Emergency Funds vs. Loans: Which to Use in a Crisis

You’re faced with a sudden medical emergency, and the hospital bill is ₹1,50,000. With your savings falling short by ₹50,000, the question arises: should you take a loan or use your emergency fund?

Let’s crunch some numbers. For a ₹10 Lakh personal loan at an interest rate of 11% over 5 years, your EMI would be ₹21,745 per month. That’s ₹2,60,940 paid as interest over the loan term. On the other hand, if you have ₹50,000 in an emergency fund, there’s no extra cost.

In fact, about 75% of Indian households have no emergency savings at all, making loans a necessity when unexpected expenses arise.

But loans are equally important for larger, unexpected expenses. What’s the best option? Let’s break it down.

What Are Emergency Funds?

Emergency funds are your financial safety net. They cover unexpected expenses without borrowing. 

For example, if your refrigerator breaks down, repair costs might touch ₹10,000. With an emergency fund, you don’t need to pay EMIs later.

Benefits of Emergency Funds:

• No interest: You save ₹0 compared to paying loan interest.
• Quick access: Your bank savings account provides immediate liquidity.
• Financial peace: No future debt worries.

Experts suggest having 3-6 months’ expenses saved. If your monthly expenses are ₹40,000, aim for at least ₹1,20,000 in savings.

What Are Loans?

Loans provide higher amounts when your savings aren’t enough. For example, if you need ₹5,00,000 for home renovation, a ₹10 Lakh personal loan can help. You’ll only pay interest on the amount you use.

But loans come with costs. Consider these calculations:

• Loan amount: ₹10 Lakh
• Interest rate: 10% p.a.
• Tenure: 4 years
• Total interest: ₹2,37,856
  You’ll repay ₹12,37,856 in total. While loans are helpful, they increase financial pressure.

When Should You Consider Loans?

• Medical emergencies exceeding savings.
• Larger purchases like weddings or education.
• Consolidating high-interest debts into one loan.

Emergency Funds vs. Loans: A Comparison

Here’s a quick comparison to decide when to use what:

This table helps you weigh options based on cost, urgency, and flexibility.

When to Use Emergency Funds and Loans?

Sometimes, the choice depends on the situation. Here’s how to decide:

• Use emergency funds:
  • Minor repairs (₹10,000-₹50,000).
  • Temporary income loss (₹1-2 lakh).
  • Sudden travel expenses.
• Opt for a loan:
  • Medical surgeries (₹5,00,000 or more).
  • Property down payments.
  • Business expansion requiring ₹10 Lakh personal loan.

Emergency funds work for manageable amounts. Loans help when expenses are too high.

Key Factors to Consider Before Choosing

1. Loan Costs: Check the interest rate. A ₹10 Lakh personal loan at 13% can cost ₹3,00,000 in interest over 5 years.
2. Savings Impact: Ensure using your fund doesn’t leave you cashless.
3. Repayment Ability: Can you afford ₹25,000 EMI monthly without stress?
4. Urgency: Emergency funds are instant. Loans take time to process.
5. Future Risks: Loans may strain your finances if unexpected issues arise.

Tips for Financial Preparedness

• Build an emergency fund of at least 6 months’ expenses. Start with ₹5,000 monthly savings.
• Compare loan options online. Look for low interest on ₹10 Lakh personal loans.
• Create a budget to track expenses and boost savings.
• Avoid unnecessary loans to protect your credit score.
• Have a mix of savings and loan eligibility for flexibility.

Conclusion

Financial emergencies are inevitable. Choosing between an emergency fund and a ₹10 Lakh personal loan depends on the expense size and urgency. 

While emergency funds cost nothing, loans offer higher flexibility. Building savings today ensures fewer loan dependencies tomorrow. What’s your plan for the next crisis?

FAQs

1. What’s the ideal emergency fund amount?
   6 months’ expenses.
2. Can I partially use my ₹10 Lakh personal loan?
   Yes, interest applies only on the used amount.
3. What if my credit score is low?
   Consider secured loans or work on improving your score first.
4. How can I rebuild my emergency fund?
   Allocate 10-20% of your income monthly.