Finance

No Emergency Fund? A Small Personal Loan May Be the Answer

Financial Stability

However, what if you don’t actually have an emergency fund. Even in a strong economy, the majority of families don’t have enough emergency savings. Well, in these scenarios, you need to look for the next best alternative.

One of the simplest, most efficient and most commonly used solutions are small personal loans. All in all, here’s what you need to know.

What do you need it for?

In the introduction, we’ve started off by mentioning the fact that, people usually apply for personal loans in order to cover personal expenses. Still, you would be surprised to learn just how many people use personal funds to finance their business efforts.

The reason why you need to know just how much money you need is due to the fact that it directly affects your ability to, subsequently, return the borrowed money. If you’ve suffered from an income loss due to the loss of a job, you can rest assured that once you find employment you’ll be able to pay it off.

However, in a scenario where you simply can’t meet your regular monthly expenses, this solution is really not that great. Why? Well, because it provides you with a postponement of your financial obligations instead of their actual solution.

How much credit can you afford?

Previously, we’ve talked about how the purpose of the loan in question may affect your ability to repay it in due time. The thing is, however, that it might be quite hard for you to calculate the amount of money that you can afford to borrow.

Fortunately, there are some reliable small personal loan calculators out there to help you figure this out. Sure, this is a crude estimate but it definitely doesn’t take too much effort or personal information and it gives you a general idea of where you’re standing.

Secured vs. unsecured

Unsecured loans are the ones where you don’t actually need the collateral. What you do need, nonetheless is a decent credit score. This is a figure based on your financial history that reveals your credit-based trustworthiness to your debtors.

Credit score

Previously we’ve mentioned credit score as one of the most relevant metrics in determining how likely you are to be vigilant with your monthly credit payments and your willingness to return the borrowed money, in general. While there are numerous different credit score reporting systems, the most commonly used one is the so-called FICO score.

The first thing you have to take into consideration is the formula used in order to make this assessment. Generally speaking, there are five major factors that determine your credit score.

The last thing you need to understand here is the scale itself. You see, the FICO score ranges between 300 and 850, the higher the number the better. As far as the scale goes, the range between 300 and 579 is considered to be very poor, the score between 580 and 669 is considered to be fair, the score between 670 and 739 is good, while a score between 740 and 799 is very good. Everything above 800 is considered to be exceptional.

Speed of repayment

This means that you might not fully experience the financial burden that this credit might impose on you. In other words, this is something that completely depends on your financial situation, at the moment.

Mistakes to avoid

Like with any other kind of financial decision, you need to keep in mind that, when it comes to loans, there are many mistakes that you can potentially make. The first mistake is the choice of the wrong loan/lender. You see, this consists of not shopping around for the best deal, falling for a scam or agreeing to unfavourable terms.

Other than this, you need to get familiar with the industry standards in order to figure out whether you’re getting a good deal or a bad one. Fortunately, this doesn’t take too much time or research.

Lastly, you need to make sure that you’re not falling for a scam, seeing as how there are a lot of lenders out there with a reputation that is… well, dubious, at very least. The very last thing you need to understand is the fact that this is not the last loan that you’ll apply for in your life, which is why you need to think about the way in which it impacts your credit score.

As we’ve mentioned previously, missing a payment or paying late is known to ruin your credit score. So, in order to avoid any of these two scenarios, you need to ensure that you always pay on time.

What are your options?

In the previous segment, we’ve mentioned that you need to explore your options in order to figure out the best-case scenario. Well, you can start by looking at the offers from a national bank or by reviewing offers from major credit unions. Then, you have some alternative methods like online lenders and local community loan centres.

Lastly, you need to keep in mind that there are some employers who offer employee loans to members of their staff. These types of loans are particularly handy, seeing as how a monthly credit payment can be directly deducted from one’s salary. Also, in some scenarios, is somewhat improves your chances of job retention.

Another thing you need to understand is the fact that a lot of people go to their friends and family in order to secure loans. What this does is create a scenario in which you get to negotiate your own terms but this method is not without its downsides either.

First of all, your acquaintances may not have this kind of money at your disposal. Second, a lot of people tend to be more lenient with their payments when it comes to friends and family members which, in turn, may worsen your personal relationships. All in all, while it clearly has its advantages, this system is not nearly as reliable as you would want it to be.

In conclusion

You see, most of the time, you’ll be faced with a scenario where your already existent emergency fund isn’t big enough to cover the entirety of your expenses. Also, keep in mind that as soon as you’re available, you need to use the opportunity to create the necessary emergency fund.

This way, you’ll be ready the next time you find yourself in this situation.

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