You already know how a financial crisis can change your life. Such unpredictable times may also impact hugely on your mental health. You can refer to the best loan apps to apply for personal loans during unforeseen scenarios in life.
Indeed, a sudden need for extra money may leave you with utmost disappointment (whether it is a close one’s medical emergency or your sudden home repair). Unlike loans with additional interest charges, an emergency fund is a smarter way to save those extras for unforeseen circumstances in life.
What’s the Need for an Emergency Fund?
Think of an emergency fund as the biggest rescuer during a financial crisis. An emergency fund is the money set aside every month. It covers the costs of unexpected events. So, the emergency fund gives you financial relief if you lose your job or your family member encounters a serious illness. The following are the benefits of securing cash for emergencies:
- Protect You Against Debt –
An emergency fund makes you financially independent. So, you don’t have to use high-interest credit cards to cover expenses. In addition, you can accumulate your debt accordingly.
- Gives You Immense Flexibility –
You can handle unforeseen scenarios confidently without worrying about disrupting your financial goals in the long run.
- Security & Peace of Mind –
Your emergency fund is your financial security that offers peace of mind during crucial circumstances. Having three to six years of your salary secured in the fund will not give you stress during medical emergencies or sudden repairs.
The thumb’s rule to build an emergency fund is to secure 3-6 months of your living expenses. However, building a solid emergency corpus might be impossible for most salaried individuals (given the rising cost of living in cosmopolitan cities). That’s where the requirement for short-term loans comes into being.
On the other hand, even if you have an emergency fund, you may find short-term loans more beneficial in certain instances. Let’s find out the differences in the following points to understand the matter in detail.
Emergency Funds or Short-Term Loans (Understanding the Differences)
Opting for loans is never your priority to cover additional monthly costs.
Nonetheless, at certain times in life, selecting a short-term loan is the best you can consider
But, accumulating emergency funds is a long process. You need time and money to save money in the fund for several months.
On the other hand, a short-term emergency loan offers instant cash. While interest charges are included, you can pay your loan accordingly based on your plans. Considering these pros, it seems a short-term loan is a more convenient choice for salaried individuals:
| Emergency Fund | Short-Term Loan |
| No interests associated with borrowing. | Using savings reduces your financial safety. That’s why an instant personal loan becomes a better choice. |
| Get access to instant cash via funds without loan approvals | Monthly repayment so it becomes more manageable for you |
| Get control over your financial scenario without debt | Some loans come with tax-deductible interest |
When Should You Choose Emergency Loans Over Emergency Funds?
Not sure whether to opt for a personal loan or use your emergency fund? Well, it depends on a few parameters mentioned below:
- Loan Cost
Comparing the rate of interest for the loan helps you understand the savings and how much you need to repay. At times, earnings from investing your fund might be higher. So, when deciding on whether to choose your emergency money or personal loan, always compare the rates first before deciding.
- How Much Money You Have in Your Emergency Fund
When confused between an emergency fund and a personal loan, you must understand what the need of the hour is. If your emergency fund has enough money to cover the cost, you can select it without a second thought. Otherwise, you can apply for instant personal or payday loans.
- Loan Terms (How Early You Need the Loan)
Is it a medical emergency or a debt payment before the due date arrives? If yes, you can always keep your emergency fund as the first choice. However, if there’s time and you’re saving money for something else, let’s not waste that fund. You can compare the interest rates of different personal loan lenders. This way, you can get the best choice based on repayment terms.
What Benefits Do You Get by Selecting a Short-Term Loan?
You have now understood why a short-term loan is better than using your emergency fund. Now, it’s time to know the benefits. The following are the advantages a loan applicant can enjoy with an instant short-term loan:
- Collateral-Free
Surprisingly, short-term loans are the unsecured ones. Thus, they do not need any collateral. You do not have to put down your home papers while opting for a loan from the lending firm.
- Seamless Application
Short-term loans are the easiest type that you can opt for. However, the loan amounts and tenure are shorter when compared to other types of personal loans. You must confirm your loan interest and tenure before the bank or lending institute proceeds with the loan application.
- Speedy Repayment
Shorter tenures mean faster repayment. So, you need to pay the loan faster than other types.
- Flexible End-Use
You can apply for a short-term loan to finance financial requirements like travel, weddings, and more. You can also use the money to renovate the house or for other options.
There are various types of short-term loans in India, such as:
- Personal Loans are unsecured loans
- Credit Card Loans are available at a limit
- Peer-to-peer lending platforms that connect lenders and individual borrowers
Notably, you have understood the benefits of building an emergency fund. This post has also defined the benefits of short-term loans over emergency funds. It’s your time to select the type of loan that ensures the utmost peace of mind during a financial crisis. When selecting an online personal loan from a lender, do not forget to compare the terms to avoid a debt trap. Keeping the above things in mind will help you achieve financial freedom and get the best loan for your needs.
