An emergency fund is a key part of a good financial plan. It can help you stay out of debt and give you peace of mind when bad things happen. Still, it can take months or even years to build up a good emergency fund, leaving you open to unplanned costs in the meantime.
Getting a personal loan and putting the money into your savings account can help you save more quickly. But getting into debt before you need it can hurt you in other ways and put your financial health at risk. Here are some things to think about before you try it.
What can you do with a personal loan?
Personal loans are one of the most flexible ways to borrow money. Personal loans are available from banks, credit unions, and online lenders. You can use them for almost anything you want, like:
- Financial emergencies
- Debt consolidation
- Vehicle or home repairs
- Home renovation projects
- Moving expenses
- Medical bills
- Funeral costs
- Business startup costs
There may be some limits, though, depending on the lender. Commonly forbidden uses include paying for school, making investments, and doing illegal things. Some lenders may also not let you pay for business costs.
Personal Loans as an Emergency Fund: Pros and Cons
If you just ran out of money in your emergency fund or are just starting to save, there are pros and cons to using a personal loan to build up your savings. Here is what to think about.
- Can give you peace of mind: While you need to make a monthly payment on your loan, having a sizable emergency savings balance can give you peace of mind in the face of potential expenses that might come up.
- Can be relatively inexpensive with great credit: Some online lenders offer interest rates as low as 6%, which can help keep your interest charges low. If you can afford the monthly payment and you’re willing to pay a little interest in exchange for peace of mind, it could be a good fit.
- Gives you access to money when you need it: If you wait until you’re in the midst of a financial emergency to apply for a personal loan or a 0% intro APR credit card, you might not get the funds you need when you need them.
- Can be expensive: If you don’t have excellent credit, it can be difficult to qualify for a low interest rate, making it an expensive endeavor. The more you borrow, the more expensive the interest will be.
- Monthly payment can be high: Depending on how much you borrow, it may be difficult to keep up with the monthly payments. You could reduce your payment by opting for a longer repayment term, but that will result in more total interest charges.
- It may not be necessary: It’s generally best to avoid going into debt unless you absolutely need to, especially if it’s expensive debt.
Other ways to get money in case of an emergency than a personal loan
Even though it might be tempting to take out a personal loan to build up your emergency fund, there aren’t many times when it makes sense to do so. Before you go that way, you might want to think about these other options:
- Create a budget. Look at your income and expenses from the last few months, and then put your expenses into categories so you can see where your money is going. You can then decide how you want to spend your money to put the most money into your emergency fund.
- Pay yourself first. Instead of saving whatever is left over at the end of each month, include savings in your budget and set up automatic transfers from your checking account to your savings account when you get paid to make sure it happens.
- Use credit cards. If you have a financial emergency when you don’t have much cash, a credit card might not be the best choice. But if it’s a small emergency, the interest you pay could still be less than what you’d pay over the course of several years on a personal loan. And if you have time, you could apply for a credit card with a 0% intro APR. If you can pay off what you charge before the promotional rate ends, you might not have to pay any interest at all.
- Borrow from friends or family. When you have unexpected costs, you can also ask family and friends for help. Again, this isn’t the best solution, but it can help you get back on your feet temporarily without getting into high-interest debt. Just make sure to put the deal in writing and pay back the loan when you said you would.
Putting your emergency savings on a personal loan is risky, especially if your credit needs some work. Even though there are some benefits, most people may be more worried about the risks.
Experian CreditMatchTM can help you get matched with personal loans based on your credit profile if you need a personal loan for an emergency.