At a Glance

Unexpected expenses can occur suddenly and potentially break the bank, but learning about the pros and cons of using personal loans to help with payment can help.

Predicting when a financial emergency is going to occur is impossible. Considering the financial hardship caused by the ongoing global pandemic, it can be challenging to find time to get all your finances in order. As a result, you may not have cash on hand in the case of unexpected expenses.

Rest assured that there are options in place to help you with payments. Personal loans can be a valuable lifeline, but it’s crucial that you perform research ahead of time as different lenders can charge higher interest rates or tack on additional fees. Developing an understanding regarding the type of personal loan you need for your unexpected expense and what fees are associated will help you make an informed decision.

How can you use a personal loan for unexpected expenses?

Should you find yourself faced with an unexpected expense that threatens to break the bank, a personal loan can provide specific assistance. This is since with a personal loan, you first learn how much money you need to borrow and then apply for a loan of that amount. A lender will then use both your credit report and history to see if you are eligible for that loan and what interest rate will be associated with it.

The versatility of personal loans allows them to be used for the following unexpected or emergency expenses:

  • Financing home improvements or the purchase of a major appliance
  • Hospital bills for you or someone else’s injury or veterinarian bills for your little friend
  • Wedding, honeymoon, or other special events
  • Debt consolidation

Related: What are Personal Loans Used For?

There are many other uses for personal loans beyond the above common examples. Before jumping into an offer, however, it is important to go over how a personal loan for unexpected expenses works.

With a personal loan, there are typically four main terms of the agreement:

  1. Principal: Your principal is the sum total amount that you are borrowing today and may or may not include an origination fee for the loan
  2. Tenor of the Loan: A tenor is the amount of time, whether months or years, that you will be paying the loan off
  3. Monthly Payments: This is the agreed upon amount you will be responsible for paying back each month of the tenor
  4. Interest: This variable rate (depending upon a number of factors) is what the lender charges you to finance the loan

As a real-world example, suppose you have a $1,000 trip to the veterinarian that you cannot cover with your cash on hand. After consulting your financial professionals and researching personal loan options for providers, the best offer you receive is at 5% simple-interest over two years.

  • Principal: $1,000
  • Tenor: 2 Years
  • Interest: 5%

Two years from the loan’s origination date, you will have paid back $1,100 back including all interest. This example assumes you did not miss any payments during your repayment.

Given the wide variety in uses for a personal loan, many lenders offer loans that are specific for certain categories mentioned earlier. These specialized offers can sometimes provide favorable interest rates and optimized tenors for the loan based on previous borrowers.

It’s important to not rush into a personal loan. You may be able to qualify for better interest rates from lenders who you’ve been a customer with for years, such as a bank or other source. That’s why developing an understanding of the different types of loan lenders can help in your decision.

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How to compare personal loan lenders

Factors such as additional fees, varying interest rates, flexible repayment options for credit scores, and more are all things to consider when researching lenders offering personal loans. As mentioned, you may receive a more favorable interest rate from a lender who you have an established history with (assuming that relationship has been good) such as your bank.

In general, it is best to avoid lenders who tack on origination or sign-up fees. Every dollar saved in your repayment is a dollar that stays in your wallet.

When looking at different lenders, consider a few of the following questions:

  1. What is the minimum credit score required?
  2. Is there another lender that I have an established relationship with?
  3. What is the interest rate being offered and have I researched other providers for a better rate?

The absolute best way to compare rates from different lenders is to go to their websites and submit all of your information to see if you prequalify for the loan you seek. A prequalification does not count as a hard inquiry to your credit, in most cases, and this soft pull will not impact your credit score.

Information you will need to provide may include, but not be limited to: name, date of birth, address, SSN, annual gross income, and other financial information. This will allow you to see if the lender prequalifies you for any loan amount and the associated interest rate and tenor.

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How to apply for a personal loan

The process of acquiring a personal loan encompasses a few crucial steps:

  1. Determine the cost of your unexpected expenses: Add up the sum total of the expenses you wish to get covered through a personal loan. In almost all cases, it is better to have a single personal loan that covers your emergency expenses, rather than multiple. Consolidating your borrowing will save you money over time.
  2. Crunch the numbers: It is one thing to understand how much money you need to cover your expenses, but it’s an entirely different thing to know what you will owe over time. There are a large number of personal loan calculators online that can help you see the value.
  3. Look at your credit score: Many banks now offer soft pull credit checks. Understanding your credit score will aid you in your research process for a loan and allow you to see what types of loans you may qualify for.
  4. Become a researcher: As mentioned above, don’t settle for the first personal loan you are qualified for. Go from website to website and note down which lenders offer the best rates and lowest fees.
  5. Apply for the specific loan type you need: Don’t opt for a medical loan if you are seeking a personal loan for wedding expenses. If possible, source a lender who is providing a specialized loan.
  6. Provide necessary documentation: After applying, a lender will likely reach out or request right then certain documents mentioned earlier. Provide everything as soon as possible to speed up the process.
  7. Make and continue to make payments: The personal loan process doesn’t end when you are approved for the loan. Personal loans for unexpected expenses are most beneficial if you pay on time for the entirety of the loan. What helps you prepare for unexpected expenses is putting small chunks of money away with each pay check to ensure you have the funds needed to pay off a personal loan.

Learn more: How to apply for a personal loan

Alternatives to pay unexpected expenses

Personal loans aren’t the right option for everybody. Whether you simply want another form of payment assistance, don’t qualify for a personal loan, already have a loan outstanding, or a number of other reasons, rest assured knowing there are alternatives:

1. Peer-to-peer loan: If you have friends or family members willing to spot your emergency expenses, this can be a helpful option.

Learn more: How Does Peer-to-Peer Lending Work

2. Credit card or personal line of credit: A credit card offers you funds that can be used on a rolling basis up to a specific limit (in most cases). A personal line of credit performs the same job but can offer a higher line of credit than a credit card in most cases. Higher credit scores will be necessary to receive significant credit limits.

3. A 401(k) loan: This type of loan will draw funds from your retirement fund, rather than from a lender. If you have a stable job and can pay off the loan quicker, rather than later, this can be an effective option. Just remember that too many of these loans can have a serious impact on your retirement goals.

Related: Should You Borrow From 401k Loan To Pay Off Debt

4. Salary advance: In some cases, an employer may agree to give some or all of your paycheck in advance to cover unexpected expenses.

Personal loans for unexpected expenses with bad credit

As alluded to, higher credit scores often result in better odds to be approved for a personal loan. This is why taking the time to build your credit over time, ensuring you make on-time payments on any outstanding lines of credit, is so important. That said, it is not impossible to secure a personal loan with lower or bad credit, but it will likely cost you more overall.

According to Experian, poor credit is classified as a FICO score between 300-579. Lenders do factor more decisions into approval for a loan than just your credit score, but it is still a major factor. If approved, personal loans offered to borrowers who fall into this category will typically have sky-high interest rates, origination fees, and more costs.

If you don’t have the best credit, you may be able to get the emergency expenses you have covered by other, cheaper methods outlined earlier.

There are a number of benefits to personal loans, but ensuring you do adequate research before jumping on an offer is the best way to save money in the long term when covering emergency expenses.


While you may not be able to predict emergency expenses, you can take a few steps that teach you how to prepare for unexpected expenses:

  • Set aside a small portion of your paycheck (even 2-5% is better than nothing)
  • Create a dedicated emergency expense fund
  • Look into a 0% APR credit card
  • Monthly personal budget reviews

What is not true about unexpected expenses is that you are unable to get help with coverage. There are many ways to how to deal with unexpected expenses if you know where to look.