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Key takeaways
- When you apply for an emergency loan, a lender usually performs a hard credit check to review your credit history and reports, which temporarily lowers your credit score.
- Making on-time payments on an emergency loan can help improve your credit over time.
- Receiving an emergency loan can give you a better credit mix (variety of account types) and improve your credit score if paid on time and in full.
Before you take out an emergency loan to cover unexpected expenses, consider how it may affect your credit. Taking out an emergency loan, just like any other type of loan, will have some impact on your credit score. However, the credit score impact of an emergency loan won’t necessarily be a big negative one. In fact, if you manage the loan well, it may even help raise your credit score in the long run.
How emergency loans affect credit
Emergency loans are typically unsecured personal loans. Just like any other loan, taking out an emergency loan requires a hard credit inquiry from the lender. This can create a temporary dip in your credit score. But taking out emergency loans can also help your credit score if you make timely payments.
Here are all the ways you can expect an emergency loan to impact your credit score.
Creates an inquiry on your credit report
When you apply for a loan with any lender, they do what is called a hard inquiry on your credit. This means the lender requests your credit info from the credit bureaus to understand your credit history and determine if they want to lend you money.
A hard inquiry makes your credit score go down in the short term — typically for a few months — and it typically stays on your credit report for two years. Too many inquiries at once may indicate to lenders that you are applying for multiple loans at once, and they may think you won’t be able to pay them all back.
Can contribute to positive payment history
If you are able to make timely payments, taking out an emergency loan can boost your credit score by giving you a strong payment history. Payment history accounts for 35 percent of the calculation for FICO credit scores, making it the most important factor.
Gives you a better credit mix
Your credit mix also impacts your credit score, accounting for 10 percent of your score. Credit mix is the variety of account types you have in your credit portfolio. Having different types of credit accounts open — such as credit cards, personal loans, car loans and mortgages — contributes to a better score. If the emergency loan you take out is a new type of loan for you, it can help better your credit mix and increase your credit score.
May create debt you are unable to pay back
If you take out an emergency loan without the funds to pay it back, your credit score will likely be negatively affected. Just like making timely payments contributes to a strong payment history, late payments or no payments at all contribute to a poor credit history. Your credit history is the single biggest factor that determines your credit score. Missed payments can bring your credit score down by a lot, and fast.
What is the minimum credit score for an emergency loan?
Credit score requirements typically vary by lender and loan type. However, you typically need at least fair credit — a FICO score of 580 to 669 — to qualify for an emergency loan. The better your credit, the better the interest rate you will get on the loan. A good FICO credit score is anything between 670 to 739, and very good credit scores are 740 or higher.
While better credit is favorable, it’s possible to get an emergency loan with bad credit. Options will be limited and interest rates will likely be much higher than for those with better credit scores. You might think a payday loan is your only option, but research payday loan alternatives before committing to these often dangerous, costly products.
Make sure you will be able to pay back any bad credit loan you take out. Don’t take out an emergency loan if it negatively affects your financial health, as it will likely make your situation worse in the long term.
Other eligibility requirements for emergency loans
While your credit score is important, lenders look at additional factors to decide if you seem likely to pay off the loan on time and whether they will give you a loan. These are some of the most common eligibility requirements:
- Sufficient income: The lender wants to see that you make enough money each month to pay off the loan. They want to see pay stubs or anything else that proves your income level.
- Outline of monthly expenses and payments: Lenders also consider your debt-to-income ratio (DTI). This shows how much you owe monthly versus how much you make each month. If you have a high income but also high debt, the lender may decide not to approve your loan.
- Proof of identity: This shows the lender you are who you say you are and allows them to verify all of your other information.
- Proof of address: A home address shows that your living situation is steady and makes you more favorable to the lender.
The bottom line
Whatever your emergency situation, an emergency loan will impact your credit. Consider pros and cons and evaluate your situation, your needs and your eligibility factors to determine if applying for an emergency loan will work for you. If an emergency loan seems unmanageable, look into alternatives, like a home equity line of credit, a loan from friends or family or a 0 percent APR credit card.
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