What Are Hardship Loans And When Should You Use One?

9 Min Read
Updated Feb. 23, 2024
Written By
Victoria Araj
A couple struggling over paying bills.

Even the best prepared among us will deal with the occasional unforeseen expense. A medical emergency, car accident or unplanned travel can make it hard to cover your monthly bills. Fortunately, many lenders offer hardship loans that can provide a financial assist during challenging times.

Let’s look at what hardship loans are, the pros and cons of the most popular hardship loans and whether you should apply for one.

What Is A Hardship Loan?

A hardship loan is a type of financing that helps people dealing with a financial crisis caused by an emergency expense or an income shortfall. You can use a hardship loan to cover everything from a surprise medical or car repair bill to necessities like food and rent.

While the terms of hardship loans can vary by lender, most hardship loans have small loan limits, low interest rates and short repayment terms. Some hardship loan programs also offer forbearance or deferred payments.

See What You Qualify For

Where Can You Get A Hardship Loan?

Borrowers who need help bridging a short-term gap between their income and expenses can take advantage of several loan options. However, not all financial institutions offer hardship loans. The most popular options are small banks and credit unions. If you’re borrowing against your 401(k) or another investment account, you’ll need to coordinate with your employer or your account manager.

Common Types Of Financial Hardship Loans

While hardship loans come in various forms, you can use any type of hardship loan to cover any emergency expense. However, every loan option won’t be suitable for your situation. Consider the advantages and disadvantages of each type of hardship loan to choose the one that works best for you.

Unsecured Personal Loans

An unsecured hardship loan is a type of personal loan that doesn’t require collateral to back the loan.

Lenders determine how much you can borrow by assessing your credit score and financial situation. If your credit score falls within the lower ranges, qualifying for an unsecured hardship personal loan may be difficult due to their strict eligibility requirements.

You won’t have to worry about a lender repossessing any asset of yours if you fall behind on payments. However, the loan’s interest rate and annual percentage rate (APR) may be higher because there’s no collateral securing the loan, potentially making this option more expensive than other alternatives. Keep in mind that, though there is no collateral, you may still face repercussions for late or missed payments.

Lenders typically issue the funds within 7 – 10 business days of applying. Some can even turn the funds around in 24 hours.

Secured Personal Loans

A secured loan requires collateral. Because the loan is backed by a valuable asset (a car, stocks, jewelry), lenders typically offer less stringent eligibility requirements, which can help borrowers with lower credit scores qualify for the loan.

While secured loans may offer lower interest rates, longer terms and larger loan amounts, a lender can claim the collateral due to missed or late payments, and sell it to recoup their losses.

Home Equity Loans

Homeowners typically use home equity loans to finance a home improvement project or to consolidate debt. But, if you’re in a desperate situation and have a significant amount of equity in your home, you can unlock the financial potential and convert some of that equity to cash.

Home equity loans offer fixed interest rates, which are usually lower than personal loan rates. And their longer loan terms can help make it more manageable to repay the loan.

It’s worth noting that, because your home serves as collateral for the loan, you’d essentially have a second mortgage, which would result in a second payment on your home. An additional bill can be challenging to manage when you’re already struggling. And defaulting on the loan may lead to losing the home through foreclosure.

401(k) Hardship Withdrawals

If you have a 401(k) retirement plan, you may be able to take out a short-term loan. Most employers offer this option for specific purposes, such as:

  • Repairing a primary residence
  • Avoiding foreclosure or eviction
  • Paying off qualifying medical bills
  • Funding a college degree
  • Covering funeral expenses

Before you choose this option, discuss your situation with your plan administrator to ensure you qualify.

Borrowing from your retirement account could help you avoid taking out high-interest loans or racking up credit card debt. You won’t need to meet a lender’s requirements or have your credit history checked to access the funds. However, you may pay a penalty fee or taxes if you withdraw from your 401(k). This option may derail your future retirement plans if you don’t repay what you withdrew relatively quickly.

Payday Alternative Loans

Payday loans are a notorious type of predatory lending that can trigger a vicious cycle of debt. Thankfully, many credit unions and online lenders offer payday alternative loans (sometimes called PALs). The loans are short-term, usually lasting a year or less, and have low borrowing limits.

You can use a PAL to cover a surprise bill fast. Also, a PAL may be more affordable than an unsecured personal loan. However, the loan’s short repayment term may translate into higher monthly loan payments than you expected, and compared to home equity loans or secured personal loans, the APRs can be very high.

Peer-To-Peer Loans

A peer-to-peer (P2P) loan is like borrowing money from a family member or friend, except you likely never met the person lending you money on the platform.

Here’s what you should know about P2P loans:

  • P2P loans typically have low interest rates to ensure affordability.
  • P2P lending can be an option for borrowers with low or no credit because its requirements are more relaxed than traditional lending.
  • You can damage your credit score if you default on a peer-to-peer loan.
  • Some platforms charge high service fees for loans.
  • To help promote safety among users, some P2P lenders require investors to meet specific criteria before they can lend money to borrowers.

Over the previous decade, peer-to-peer lending platforms have grown in popularity due to their accessibility. While P2P lenders lend to a variety of borrowers, they may be cautious about issuing loans to high-risk borrowers. Even if you have access to a P2P lending platform, it doesn’t guarantee you’ll be able to secure enough funds to cover emergency expenses.

Should You Use An Emergency Hardship Loan?

Now that we’ve covered the different types of hardship loans, the next step is to ask yourself whether you should use one. Your decision will primarily depend on your situation and financial goals. But, if you need a short-term infusion of a small amount of cash, a hardship loan may be a solution.

However, hardship loans can be expensive if you have poor credit. A low credit score and poor payment history can make it difficult to qualify for a hardship loan. And even if you are approved, you’ll likely pay a higher interest rate and APR.

Are There Alternatives To Hardship Loans?

If you think you can’t qualify for any of the previous options, here are some alternatives you can explore:

  • Employee assistance programs (EAPs): Some employers offer assistance for medical expenses, to repair fire or flood damage or to cover funeral Your employer may require proof, such as a financial hardship letter.
  • Nonprofit organizations: Some nonprofit groups and charities offer resources to help low-income individuals and families during financial emergencies.
  • Government grants and loans: Federal and state governments often offer grant and loan programs for residents. The programs assist with necessities, like food, childcare, housing, medicine or paying utility bills.

How To Get A Hardship Loan

The process will vary by lender and type of loan, but these standard steps can help you choose and apply for a hardship loan:

1. Check Your Credit And Your Credit Report

Taking an honest look at your credit and knowing your credit score will help you determine which programs you can qualify for. Check your credit report for any potential errors or signs of fraud or identity theft. Inaccuracies or criminal activity will negatively harm your credit history and credit score.

2. Check The Prequalification Requirements

Once you know what hardship loan you want to apply for, make sure you meet the lender’s requirements. While most lenders have guidelines they must follow when lending, try asking a lender what loan options they have that you may qualify for.

3. Compare Rates And Terms

If you’re looking at multiple lenders, run a cost comparison to decide which loan is the most affordable. Look at the interest rate and annual APR for each loan.

Consider the pros and cons of a fixed-rate versus an adjustable-rate loan. The rate on an adjustable-rate loan may be lower in the short term, but once its introductory period is over, the rate may skyrocket.

4. Submit A Loan Application

Once you pick a lender, you’ll fill out an application and provide financial information, such as pay stubs, bank account statements and tax returns.

5. Finalize Your Loan

Your application will go through the underwriting process before it’s approved. Then you’ll receive a lump-sum payment.

Hardship Loan FAQs

Check out the answers to these frequently asked questions on hardship loans.

Can I get a hardship loan while I’m unemployed?

Being unemployed can make getting any loan more challenging, but hardship loans are also supposed to help borrowers experiencing economic hardship. You’ll probably need to apply with multiple lenders or provide collateral – but it’s not impossible.

Will a hardship loan affect my credit score?

Anytime you borrow money, the lending institution records the transaction with one or more of the three major credit bureaus: Equifax, ExperianTM and TransUnion. If you miss a payment or default on the loan, your credit score will be negatively affected. But with on-time payments, your credit score can improve over time.

Should I use my credit card instead of a hardship loan?

It’s easy to understand the temptation of whipping out a credit card to cover an emergency expense. But this can be dangerous – as credit cards often have rates at or above 20%. If you use a credit card, use the one with the lowest interest rate or one that has a 0% introductory rate. Make on-time payments or pay off the bill if you can. And be mindful of the date a card’s 0% introductory period ends because the interest rate will climb once it expires.

Should I use a credit card cash advance as a hardship loan?

Many credit card companies let you take out a cash advance against your available credit – but be careful. The cash advance interest rate is usually higher than the purchase rate, and cash advances have service fees.

The Bottom Line

Hardship loans can help you cover a well-known list of unexpected costs: emergency medical care, home repairs and other necessities. Thoroughly research available hardship loans to find an option that best fits your situation. As with any major financial decision, you should speak with a financial advisor who can offer advice based on your individual situation.


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