Emergency Line of Credit: A Financial Safety Net in Challenging Times

Published on July 31, 2020 by Daniel Azzoli

Person researching an emergency line of credit on their phone and laptop.

When money is tight and you’re living paycheck to paycheck, even the smallest emergency expense can throw your budget into disarray. Maybe you’ve run over a nail on your drive to work and need to get your tire fixed, or maybe a pipe bursts in your house and you need to take care of the subsequent water damage right away. Whatever the emergency may be, trying to find the funds to stay afloat can be a challenge.

As dire as things may seem, you still may have options to turn to in order to get emergency funding in your time of need, and an emergency line of credit may be just that.

Today, we’re going to break down some of the important details surrounding these emergency loans, discuss some of the instances where an emergency line of credit might make sense to use, and go over the process of applying for one.

What is a Personal Emergency Line of Credit?

The nature of an emergency line of credit is fairly straightforward. You’ll apply for a line of credit, and if approved, you can draw this money as long as you have available credit. You’ll be charged interest and/or any applicable fees on the amount of money you use as opposed to paying charges on the total amount of credit you have available to you. In this way, it’s somewhat similar to a credit card.

Let’s compare this to something like an installment loan. With an installment loan, you’ll be given a lump sum and then be required to pay off the amount you’ve borrowed (your principal payment) plus interest and/or fees over a series of scheduled payments. With these types of loans, you’ll be paying charges on the entire amount you’ve borrowed as opposed to the amount you actually draw. This makes them somewhat less flexible than a line of credit.

How Does it Work?

To apply for a fast line of credit, you’ll likely look to places like credit unions, banks, or certain other types of financial institutions. In this case, “fast” refers to the application process, as some online line of credits may only take a few minutes to apply for. The amount of time it takes to get access to your available credit, if approved, will vary between financial institutions, but in some cases you’ll be able to get the money in your bank account as soon as one business day after you request a draw.

Another important point to note is that a line of credit is a form of revolving credit. What this means is that if you’re approved, you can borrow funds up to the amount of credit you have available to you, either all at once or in smaller amounts as needed. As you pay down your balance, you can continue to borrow money when you need it from your available credit.

In the case of an emergency line of credit, this loan will typically be unsecured. This means you won’t be required to put up any collateral to be approved. With a secured loan on the other hand, you’ll need to put up collateral in the form of an asset for a financial institution to consider approving your request. For example, with a home equity line of credit, you’ll need to secure your loan by putting up whatever equity you have in your home.

When Should You Consider Applying for an Emergency Line of Credit?

Whenever you’re considering applying for a loan, it’s important to understand what the intent and proper uses are of whatever types of loans you’re considering, and whether that lines up with your particular situation.

So, what are emergency loans intended for? It’s all in the name. If you find yourself facing an emergency expense and you don’t have an emergency fund in place to handle it, an emergency line of credit may be a useful financial safety net. If you’ve been approved and have available credit, you’ll have the funds at your disposal. What they’re not intended for is to fund your next shopping spree, a vacation, 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 intend to use the loan you’ve applied for to help with the expense, it’s still important to make sure you can actually afford the loan.

person changing a tire on a blue car.

If you’re wondering what situations constitute an emergency, these could be things like:

  • Damage to your car that’ll prevent you from getting to work.
  • A home repair that’ll only get worse (or more expensive) if you let it linger.
  • An unexpected trip to the emergency room.

Applying for an Emergency Line of Credit

When you apply for a quick line of credit or loan of any sort, a financial institution will look at a number of different factors to determine whether they should lend to you. In some cases, they may look at your credit report to determine your creditworthiness, but this doesn’t mean that you have no chance of getting approved without a good credit score. Some financial institutions may not weigh your credit score as heavily, and place as much importance on certain other factors.

For example, in order to be approved for a Line of Credit through CreditFresh, you’ll need to:

  • be of legal age to contract in your state of residence
  • be a US citizen or a permanent resident
  • have an active bank account
  • have a regular, consistent source of income
  • have a valid contact number and an active email address

Let’s take a look at some steps for you to take before applying for an emergency line of credit, regardless of which financial institution you’re considering applying with.

1. Check Your Credit Report

Before you submit a request for any emergency loans, it may be a good idea to check in on your credit report and see what state your credit score is in. You’ll likely be checking your score with one of the major credit bureaus – TransUnion, Equifax, or Experian. You’ll be able to check your credit report for free once every twelve months with each of the major credit bureaus, so make sure you take advantage of this opportunity and periodically check in on the health of your credit.[1]

As you check your credit report, you may end up stumbling upon a delinquency that shouldn’t be there. If you come across any errors, don’t wait for it to go away on its own. There are steps you can take to get this error removed from your report, and fortunately, we have an article all about it! Here it is if you want to learn more.

2. Get Your Documents in Order

As we’ve already mentioned, a financial institution will look at a few different factors when determining your creditworthiness. This can include things like the state you live in, your income, and more. Don’t wait for them to ask for the necessary documentation to start getting everything together. The more organized you are in advance, the faster the process will likely go. 

person getting documents in order to apply for an emergency line of credit.

3. Compare Your Options

Whenever you’re considering applying for emergency loans, you’ll generally want to avoid applying for the first loan you stumble upon. Make sure to take the time and review all your options before making any decisions.

There are a variety of ways in which one line of credit can differ from another. This can include things like their interest rates, term, loan amounts, fees, and more. You’ll want to look at all of these factors when comparing loans. Consider questions like:

  • What fees will I be charged?
  • Is the max loan amount enough for my situation?
  • What will the interest charges be?

These are all important factors to consider and they may vary between financial institutions, so make sure to do your homework.

Be Prepared for Emergencies

Knowing exactly when, how, and what type of emergency is going to pop up is a nearly impossible task, and digging yourself out from the financial hole created by one can be difficult. That’s why it’s important that when you do manage to get your finances back in order, you take the right steps to prepare yourself for the future.

Start by building an emergency fund to help you manage the cost of any emergencies that may come up. If your budget doesn’t have a lot of extra room for savings, just focus on saving a small amount to begin with. While it might not cover all your emergency expenses, it may be able to soften the blow. Check out these personal budgeting tips to help you find ways to save a little extra money.

You may also want to work on implementing some financial habits that may have a positive impact on your credit history. This could include things like reviewing your credit report for errors, avoid paying your bills late, and more.

While these things won’t completely safeguard you from any emergency you may run into down the line, they may be able to provide you with a little comfort knowing that you’ll be a little more prepared when something does come up.

Disclaimer: This article provides general information only and does not constitute financial, legal or other professional advice. For full details, see CreditFresh’s Terms of Use.

[1] https://www.annualcreditreport.com/index.action