Ran Out of Emergency Savings? This Might Be Your Next Best Bet

Having an emergency fund could spare you the cost and stress of racking up debt when a need for money arises out of the blue. But the money in your savings account might eventually run out on you. Or, it might quickly run out if you encounter a major home repair issue or another large expense.

But what if your emergency savings run out and you need money before you've had a chance to rebuild? At that point, borrowing might be your only option. But there's one route that may be less financially painful than others.

A personal loan could come to your rescue

You might start with an $8,000 emergency fund only to have to spend that entire sum to replace your car's transmission. If you then run into a $5,000 home repair a few months later, you may have no choice but to borrow to cover it.

At first, whipping out your credit card might seem like the best solution. But a personal loan could be a better choice for a couple of reasons.

First, the interest rate on your personal loan may be considerably lower than what a credit card will charge you. And also, that interest rate will generally be fixed.

With a credit card, your interest rate may be variable, and that could easily drive up the cost of your monthly payments over time. But with a personal loan, you get the benefit of fixed, predictable monthly payments. And having those could make it easier to not only keep up with your debt but figure out a budget that allows you to work on replenishing your emergency fund at the same time.

Plus, personal loans are extremely flexible in that they can be used for any purpose. You could even take one out to consolidate credit card debt.

Is a personal loan the right choice for you?

If you're out of emergency savings and own a home, borrowing against it might cost less from an interest rate perspective than signing a personal loan. But if you don't have a home of your own, then a personal loan could be a cost-effective option, provided you have good credit.

Personal loans are unsecured, so they're not tied to a specific asset that can be used as collateral. As such, the lenders that write these loans take on a fair amount of risk.

But the higher your credit score, the less risky a borrower you are to a lender. And that could result in an interest rate that makes your loan affordable.

As of the first quarter of 2023, U.S. personal loan balances had risen to $225 billion, according to data from TransUnion. So clearly, they're a pretty popular borrowing option. And so while it's always more ideal to dip into savings to cover an unplanned bill than to borrow for one, if your cash reserves have been depleted, it could make sense to shop around for a personal loan to cover the expense you're suddenly saddled with.