Hardship Loans: What They Are & How To Get One

What is a hardship loan?

A hardship loan is a type of loan designed to help you get through unexpected financial challenges.

For example, if your car breaks down, you can use the funds from a financial hardship loan to repair it and ensure you have a reliable way to get to work each day.

You can also use a hardship loan in the following situations:

• You need to drop everything and travel to another state to attend a funeral or take care of a sick loved one.
• You lost your job and need funds to pay your bills while you wait for your unemployment payments to start coming in.
• You have to pay an unexpected medical bill.
• You have to take unpaid time off to care for a sick child or elderly parent.
• You need money to fix or replace an appliance or a critical piece of HVAC equipment.

During the COVID-19 pandemic, many banks offered coronavirus hardship loans. The loans, usually issued for small amounts, were intended to help people who lost their jobs or couldn’t work due to COVID-19. The federal government even launched the Paycheck Protection Program (PPP) to help business owners cover their payroll expenses during pandemic-related lockdowns.

Pros and cons of hardship loans

Pros explained

• Immediate access to funds: Hardship loans offer quick access to cash. This can be a lifesaver during emergencies or when unexpected expenses arise.
• Flexible use: You can use a hardship loan for almost anything. This makes hardship loans more flexible than other types of loans.
• Quick approval process: Many lenders have a quick approval process. If you need money right away, this makes it easier to get the funds you need.
• Potentially lower interest rates: Some hardship loans, especially those from employers or special programs, may come with lower interest rates than credit cards or payday loans.

Cons explained

• They impact your credit score: Like other loans, hardship loans have an impact on your credit score. When you apply for a loan, the lender usually does a credit check, which results in a hard inquiry on your report. If you’re approved, this type of loan will also increase the amount of debt you have, causing a temporary drop in your credit score.
• Might not qualify with bad credit: You may not qualify for a hardship loan if you have bad credit or less-than-perfect credit. Alternatively, the lender may require you to have a co-borrower.
• May have origination fees: Many lenders charge origination fees, increasing the total cost of borrowing money. For example, you may have to pay a fee equal to 5% of the loan amount. If you borrow $2,000, that’s an extra $100 in fees.

Common types of hardship loans

Hardship loans come in many forms. Here are some examples of different types.

401(k) hardship withdrawal

A 401(k) hardship withdrawal allows you to take money out of your 401(k) and use it to cover an “immediate and heavy” financial hardship. Your plan administrator has the final say over whether your financial situation qualifies as immediate and heavy. Additionally, you can only request the amount of money needed to satisfy your financial need. For example, if you need $1,500 to repair your vehicle, you can only take out $1,500.

Secured hardship personal loans

When you get a secured loan, you have to put up collateral. In the financial industry, collateral is a valuable asset that you use to secure a loan. If you don’t repay the loan as promised, the lender can seize your collateral and sell it. A mortgage is one of the most well-known examples of a secured loan, as your home serves as collateral for the bank.

Unsecured hardship personal loans

If you qualify for an unsecured loan, you don’t have to put up any collateral. This is a bigger risk to the bank, so you may not qualify for an unsecured loan if you have bad credit or limited credit experience.

Home equity loans

Home equity is the difference between the value of your home and the balance left on your mortgage. For example, if you owe $300,000 on a home worth $600,000, you have $300,000 in equity (50%). A home equity loan allows you to borrow against this equity.

Payday alternative loans

Payday loans have extremely high interest rates, making them one of the most expensive loan products available. If you can’t pay back the loan as scheduled, the lender may allow you to roll the old loan into a new one. This makes it too easy to get trapped in an endless cycle of debt.

Many credit unions offer payday alternative loans (PALs) to help you avoid this type of financial burden. PALs have lower interest rates and longer repayment terms than traditional payday loans, making them more manageable.

Peer-to-peer loans

With a peer-to-peer loan, you borrow money from an individual instead of a bank. This type of financial assistance usually comes with a lower interest rate than you’d get with a credit card. Additionally, the requirements aren’t as strict as those established by banks, so it’s easier to qualify if your credit report has a few blemishes.

How to get a hardship loan

To get a loan during a financial hardship, you usually need to follow the steps below:

• Check your credit score: Before you apply, check your credit score to get an idea of how high or low it is. Many banks and credit card companies offer free FICO scores to their customers. If you don’t have access to free scores, visit MyFICO.com to pay a one-time fee to see scores from the big three credit bureaus: Equifax, Experian and TransUnion.
• See how much loan you can afford: The right loan amount depends on how much money you need and how much you can afford to repay. Try using our loan interest calculator to estimate your required payment. This makes it easier to determine if a loan repayment is likely to fit into your budget.
• Prequalify with multiple lenders: Prequalifying is the process of determining if you’re likely to be approved for a loan. During this step, the lender does a cursory review of your financial situation. To prequalify for a loan, give each lender information about your income, assets and debt.
• Compare your loan offers: Some loans have better terms than others. For example, one loan may have a much higher rate than another, making it more expensive. To determine which offer is best, compare interest rates, origination fees and repayment terms.
• Prepare your documentation: When you apply, your lender will ask you to provide several documents. Make sure you have pay stubs, bank statements, tax returns and other documents to give the lender a clear picture of your financial situation.
• Apply with your preferred lender: Now it’s time to apply for a loan with your selected lender. This process is a lot easier than getting a mortgage, but it does take a little effort. You’ll need to fill out the application, provide the requested documents and sign the loan agreement.

The requirements may vary based on the lender and the type of loan you choose, so be prepared to complete additional steps if requested.

Can I get a hardship loan if I have bad credit?

Yes, it’s possible to get a hardship loan with bad credit. You may have to use a peer-to-peer lender or take out a small payday alternative loan, but many lenders have options for borrowers with no credit or bad credit.

Tips for comparing hardship loans

When you’re comparing hardship loans, look at the following:

• Payment amount: Can you afford to make the monthly payment on your income? If not, look for an alternative.
• Interest rate: The higher the rate, the more interest you pay over time. Check the terms of each loan to see if one has a much lower rate than the others.
• Fees: Some lenders charge a flat fee, while others charge you a percentage of your loan. Compare the fees across all loans to determine which one is most affordable.
• Funding schedules: If you need money right away, look for a lender that can fund your loan in a couple of days rather than a week or more.

Alternatives to hardship loans

If you’re denied a loan or don’t want to get a hardship loan, there are other options available.

These are some alternatives to hardship loans:

• Employee assistance programs: If your company has an employee assistance program, check to see if you can get free financial counseling or access other financial resources.
• Nonprofit organizations: Churches, food pantries and other nonprofit organizations often provide assistance to help people get through financial emergencies.
• Government loans and grants: Check to see if you qualify for any government-based loans or grants. You may be eligible for a loan with a low interest rate or a grant that you don’t have to repay.
• A personal or home equity line of credit: A line of credit gives you access to money whenever you need it. You only have to pay back what you borrow, so if you have a credit line of $10,000 and need just $1,000 for an emergency, you only have to repay the $1,000 you use.
• A personal loan: Consider getting an installment loan from a bank, credit union or online lender. This is a good option if you need more money than you can get with a hardship loan.
• Cash advance apps: These apps offer quick access to small amounts of cash, typically up to a few hundred dollars, to help you cover immediate expenses without going through a lengthy loan application process. You’ll get the funds quickly, but you must repay them promptly to avoid very high interest rates.