Emergency Cash Loans: Risks and Dangers

Emergency cash loans can be used to meet an unexpected cash need such as a vehicle repair or catastrophic health emergency. An emergency loan is available when a borrower does not have another dedicated source of funding available to meet their needs. The nature of an emergency cash loan is short-term and provides a gap funding in anticipation of a person’s paycheck or money from another source.

Emergency cash loans, which include money from friends and family, vehicle loans, payday loans and a line of credit or equity loan, should be viewed as an occasional or one-time source for the direst circumstances. There are many risks and dangers that are associated with relying on emergency cash loans as a way to meet longer-term financial needs.

Higher Interest Rates

A home equity or line of credit, or borrowing from a credit card may result in a higher interest rate than a traditional loan carries. This is due in part to the inherent risk associated with short-term borrowing, particularly borrowing that is based on some emergency short-term need. The higher interest rates associated with these types of emergency cash loans may create a worse financial situation for the borrower.

This is especially true of payday and vehicle loans. Many jurisdictions regulate the terms of these loans because of the potential of abuse by the lender with interest rates and credit terms that are well beyond what is charged on conventional loans. An individual that must rely on a car title or vehicle loan or a payday advance may find themselves in some instances paying interest that is as high as 400 percent the loan rate. This can place an additional burden on the borrower in need of the emergency assistance.

May Become a Long-Term Financing Source

The reliance on emergency cash loans can become a more long-term solution for some borrower, given the nature of their financial situation. This is again true in the case of car title vehicle and payday loans that tend to target lower-income borrowers who rely on their paycheck as a main or only source of income. The interest rates on these loans add up over time and create a significant burden to the borrower, especially if it is not paid back in time. The more loans of these types that a person borrows to meet such emergencies as food, rent, medical and other housing needs only exacerbates the problem.

Lead to Financial Hardship

An emergency cash loan that is frequent can create a financial hardship for the borrower or potentially lead to bankruptcy or loan default. These situations impact the borrower’s credit rating and their ability to borrow in the future.

Emergency cash loans should be used cautiously and not become a source of regular financing for an individual. Debt counseling, budgeting and financial assistance programs in the community may need to be accessed in order to address a borrower’s long-term financial needs.

 

 


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