Between rising prices, global wars and trade tariffs, most of us have lived through at least one financially distressing situation of late. You can give yourself a pat on the back if you’ve been preparing yourself financially with smart budgeting techniques and saving up for an emergency fund.
These can come in pretty handy when an unforeseen expense arises. However, you can manage an unexpected, financially challenging situation even if you haven’t saved up for a crisis by applying for an emergency loan. This type of credit is designed specifically to meet your urgent and unforeseen monetary needs and make all the difference when you’re short on time and cash.
If you’re worried about how applying for an emergency loan can impact your credit score, you are not alone. Lenders often run hard credit checks for such applications, which can show up on your credit report.
In this article, we discuss 3 factors you need to consider when applying for a rainy day fund without negatively impacting your credit score.
1. Understanding Soft and Hard Credit Checks
Most lenders use soft or hard credit checks to process your loan application. It helps them assess their lending risk and your creditworthiness to repay the loan. However, among these checks, hard credit checks are marked on your credit history and have an impact on your credit score.
Hard credit checks are typically issued only for loans with higher lending risks. When you need an emergency loan quickly, it can be tempting to approach multiple lenders simultaneously. However, submitting several loan applications in a short span of time can trigger multiple hard checks on your credit report. This may lower your credit score and negatively affect your credibility as a borrower.
What you can do instead is to choose emergency loans where lenders are upfront about using only soft checks. This can help protect your credit score and avoid unnecessary checks.
2. Avoid Predatory Lenders
Choosing the right lender for your emergency can make a huge difference in your borrowing experience and how you manage your urgent expenses. You are more likely to make hasty decisions in a bid to secure funds quickly while unwittingly becoming a victim of predatory lending practices.
For this reason, it’s always important to read the fine print and choose only FCA-approved, ethical lenders for your emergency loan. They’re more likely to have transparent and reasonable terms and conditions, giving you a fairer deal. However, this doesn’t excuse you from doing your due diligence. Be sure to especially review repayment terms and conditions to understand whether this realistically meets your financial capacity.
You could also scour the loan document for any hidden fees, early repayment fees, or penalties for missed payments. Beware of lenders who offer you amounts higher than what you’ve asked for on your application. Borrow only what you need to manage your emergency.
3. Consider Alternatives to Emergency Loans
While emergency loans are designed to meet your urgent expenses, you can consider other credit options for a more manageable financial solution. Emergency loans typically come with short repayment periods, so it’s key to ensure you choose the right loan.
Loans with short repayment periods like this generally make managing day-to-day finances more difficult as they give you little time to prepare or make budgetary adjustments. Some lenders provide emergency loans with longer repayment periods, which are a comparatively safer alternative.
However, it might be helpful to explore more secure options like borrowing from a credit union, direct lenders or requesting salary advances. They’re likely to offer you more affordable loan options to address your situation without harming your credit score with hard checks or high-interest rates.
Conclusion
Facing an emergency expense can be stressful, but with a clear plan and financial discipline, you can manage it effectively. Start by reviewing your budget and pausing non-essential spending to free up immediate funds. Doing this even for a few days can help tide you over a challenging financial situation.
On the other hand, emergency loans may offer short-term relief, but they should be a last resort. Safer, low-cost borrowing alternatives are often available and can help cover urgent costs without harming your credit score.
Making informed decisions in a crisis not only protects your finances but also strengthens your long-term financial health.
Our advice – choose wisely, choose well!
More Posts About Emergency Loans:
- Best Places To Borrow Money in Case of a Family Emergency
- Financial Questions to Ask Before Taking Out an Immediate Deposit Loan
- 4 Cashflow Pathways All Moms Should Know About When They Need Emergency Cash
