When money is tight and you’re living paycheck to paycheck, even a small emergency can throw your budget out of whack. Maybe you’ve run over a nail on your drive to work and need to get your tire fixed, or maybe your kid took a bad fall and needs an emergency hospital visit. It might feel like you have no options.
But as overwhelming as things can seem, there still might be some options you can turn to in order to get the financial help you need. One of these potential options is an emergency line of credit.
Today, we’re going to break down some of the important aspects of these types of emergency loans, go over some scenarios where an emergency line of credit might make sense to use, and talk about what the process of applying for one looks like.
What is an Emergency Line of Credit?
An emergency line of credit is straightforward. You apply for a line of credit, and if approved, you’ll be given access to funds that you can draw money from. You’ll only be able draw funds if you have available credit.
Example
Let’s say you apply for a line of credit and get approved for one with a credit limit of $1,000. You can then request any amount of money (called a draw) for up to $1,000. If you take a draw of $400 one week and want to draw more money the next, you’ll only have access to another $600 of your $1,000 limit. As you continue to pay down your balance, you can request money when you need it from your available credit on a revolving basis.
But what will you need to repay other than the amount you’ve borrowed (your principal payment)? With a revolving line of credit, you’ll be charged interest and any applicable fees on the amount of money you draw from your line of credit.
So, if you look at our example from earlier, you’ll pay interest and fees on the $400 dollars you’ve drawn, not the $1,000 you have available.
Let’s compare this to something like installment loans. With an installment loan, you’ll be given a lump sum if your application is approved. From there, you’re going to need to pay off the amount you’ve borrowed plus interest and/or fees over a series of scheduled payments. With these types of personal loans, you’ll be paying charges on the lump sum you’ve borrowed. This is different from a line of credit in which you borrow funds up to a specific credit limit and you do not have to use all the funds that are available to you. For this reason, lines of credit tend to be a bit more flexible.
Looking to apply for an online line of credit to help you out in an emergency? Click here to get started!
Where Can I Apply for a Line of Credit?
If you’re looking to apply for a line of credit, you’ll want to look to places like banks, credit unions, independent storefront lenders, or online lenders. When you’re dealing with an emergency and need a speedy process, online loans will generally have a pretty fast application process. In some cases, you can work through your application in just minutes and hear back on whether they should lend to you and provide you with the emergency financial assistance you require relatively quickly.
When we’re talking about how long it actually takes to get access to money if you’re approved, it’s going to vary. In some cases, you’ll be able to get money in your bank account as soon as the same business day, but this is going to depend on your bank and the lender you’re working with.
When Should I Consider Applying for an Emergency Line of Credit?
If you’re staring down an emergency expense and you don’t have an emergency fund in place to help you deal with it, a line of credit may help.
They aren’t intended to finance big purchases, or even to be factored into your long-term savings plans. Even in a situation where you’ve run up against an emergency and only plan to use your line of credit to help with the expense, it’s still important to make sure you can afford to pay off what you’ve borrowed. Otherwise, it can lead to some serious financial problems for you down the road.
Be Prepared for Emergencies
Knowing exactly when and how an emergency is going to pop up is impossible, and digging yourself out from the financial hole it can put you in is a tall order. That’s why it’s important that when you do manage to get your financial situation back on track, you take the right steps to prepare yourself for the future.
You can start to work towards doing things like building a budget that works for you, putting together an emergency fund, and cutting back on some of your spending. In general, you’ll want to do your best to implement as many healthy financial habits as you can and stick to them.
If you’re looking for some more financial guidance, you can use a free online tool like SpringFour. It may be able to connect you with resources in your community to help guide you through managing your finances.
If you’re looking for some more financial guidance, you can use a free online tool like SpringFour. It may be able to connect you with resources in your community to help guide you through managing your finances.
And as we said earlier, an emergency line of credit can be useful to keep in mind if your back is against the wall and you need a hand in a financial emergency!
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