When unforeseen expenses raise their ugly heads, you rush to dip into your nest egg. Unfortunately, not many people have an emergency corpus to fall back on. Unavoidable expenses will not wait for you to burn a hole in your pocket until you arrange some cash. Emergencies need your immediate attention.
In case of unforeseen expenses, you can consider borrowing money from either direct lenders or family or friends. It feels easy to borrow money from family, but this practice is subject to drawbacks, too. For instance, failing to pay their money back will affect your relationship.
Upsides and downsides of emergency loans from direct lenders
An emergency loan is a small loan that you take out to fund unexpected expenses. The size of these loans is between £100 and £1,000. However, a lender will sign off on your application based on your affordability. Most of the time, lenders cap at £700 as they are discharged in one fell swoop, which makes it challenging for borrowers to repay them.
These loans charge high interest rates as they are generally aimed at subprime borrowers. In case you fail to adhere to payment terms, the debt will keep rolling over, snowballing into a larger debt. An emergency cash loan is recommended when you are completely certain about your repayment capacity.
Here are the merits and demerits of emergency loans from direct lenders:
| Pros | Cons |
| These loans are easily available. Even subprime borrowers can easily qualify for these loans. | Emergency loans charge a high annual percentage rate (APR). |
| Money is approved instantly. The loan process is completed within the same day, so you do not have to wait for too long to receive money. | They can be difficult to manage because they are paid down in a lump sum. Chances are you are left with little money for essential expenses, which results in re-borrowing. |
| You do not have to discuss financial problems with anybody else, so there is no sense of embarrassment. | They are subject to hidden fees and charges, which you might not be aware of until a loan contract is handed to you. |
| A flexible repayment term is offered, which means you will be offered either a weekly repayment plan or a lump sum repayment plan. | Emergency loans cannot help build your credit rating even if you clear all dues on time, but they can ruin your credit score if you abdicate responsibility. |
| They are not backed by collateral, so there is no risk of losing your asset in case of default. | The borrowed sum is very small. They cannot be ideal for large, unexpected expenses. |
Benefits and drawbacks of borrowing from family
Borrowing from a family member is the best alternative when you know you will not be able to afford a debt. However, it is not always a cinch. Sometimes, they might be in a tight spot and may have to refuse you. As a matter of fact, it is also your responsibility to ensure that they do not lend money by going out of their comfort zone, as this could negatively impact their financial condition.
Here are the advantages and disadvantages of borrowing from family:
| Pros | Cons |
| You do not have to pay interest. Even if you sign a formal agreement, you do not need to pay as much interest as you would with emergency loans. | Your relationship with them can be affected if you fail to pay them back. |
| Repayment schedules are flexible. You can decide to repay in instalments over a period of time or in a lump sum. | It feels like going with a cap in hand. You might feel embarrassed and awkward while seeking financial assistance from your family. |
| You can request to borrow slightly more money, which is usually not the case with emergency loans. | You may feel overwhelmed by emotional stress as your true financial condition is disclosed to someone you would prefer to keep it from. |
| There is no fear of fees and associated charges, even if you have to pay some interest on top of what you borrow. | There is no formal repayment structure, which might lead to confusion and misunderstandings. |
| Your credit score will remain intact. No hard inquiries are made, so you do not lose your credit points. | Your family member might struggle after lending you money. Sometimes, people are not in a position to refuse straightaway. |
| You can get quick access to cash. No formalities like long application forms and tedious paperwork. | If your credit score is already bad, it does not give you a chance to ameliorate it, even if you pay back the debt on time. |
The final word
Whether you borrow money from a direct lender or a family member, make sure that you will be able to pay it back on time as promised. You should evaluate your financial condition to decide between the two options. If you choose to borrow from family, make sure that they will not suffer as a result of lending you money.
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