An unexpected financial crisis, such as a sudden job loss, medical bill, repair or another emergency expense, can cause a major strain on your budget. Hardship loans can help in a tough spot, giving you a financial safety net to cover those surprise costs.
But what is a hardship loan? In reality, it’s just a marketing term for a personal loan or other financial product. You may see loans advertised as helping during a financial hardship, but there’s not a single standardized product. When you’re experiencing financial distress, understand your options and eligibility before you make your next move.
- A “hardship loan” is a term for emergency financing used during difficult times, particularly if you lose your income.
- Personal loans, credit union loans and employer assistance are all avenues to consider.
- Eligibility requirements vary, but generally include credit, income, employment and existing debt.
- In addition to financing, consider looking at community assistance programs, bill negotiation and credit card hardship programs.
What Is A Hardship Loan?
A hardship loan can be a personal loan or other type of emergency financing used during a period of financial difficulty. Here are the most common types of hardship loans you may encounter.
Unsecured Personal Loans
An unsecured personal loan lets you borrow a lump sum of cash with monthly payments spread out over 1 – 7 years, depending on your loan terms. Because it’s unsecured, you don’t have to use any collateral such as a vehicle or another item of value. Interest rates are typically fixed, which keeps your payment the same each month.
Lenders usually offer personal loans between $1,000 – $50,000 (though some lenders may go as high as $100,000), giving you flexibility depending on the scale of your hardship. Of course, you’ll need to meet personal loan requirements in order to qualify.
Most personal loans don’t come with restrictions on how the funds can be used. You can use the money to pay off medical debt, cover bills while you job hunt or anything else to help you get through a rough patch.
The application process includes submitting a loan application, providing the lender with documentation, getting a credit check and signing the loan agreement. After that, the loan funds will be dispursed and you’ll soon start making payments. Online lenders usually complete the loan application within a few business days, although some may offer same-day funding if you apply early enough in the day. It can take even longer for brick-and-mortar banks or credit unions.
Credit Union Loans
Local credit unions offer similar services as banks, but they’re not-for-profit and member-owned. Oftentimes, credit union loans are underwritten locally instead of through an automatic decision-making model, offering more qualifying flexibility. You may have a better chance of getting approved, especially if you have an existing relationship with the credit union.
Because credit unions don’t operate for a profit, you may also qualify for a better interest rate, even if your credit history isn’t perfect. Another perk of credit union loans is that they usually offer smaller loan amounts, so you can borrow only what you need versus the larger minimum amounts at big banks.
Employer Assistance
Depending on where you work, your employer may offer benefit programs designed to help employees during times of financial hardship. For example, there may be a hardship funds program that allows you to apply for grant money when you’re experiencing a difficult time. You may also have access to free financial counseling.
Another potential employer resource is a salary advance, also called earned wage access, which is when your employer pays a portion of your paycheck early. That amount is then either subtracted from your next paycheck, or spread out across several paychecks so it doesn’t feel as financially stressful. This is more common with larger employers and is offered by 2.5% of corporate employers (think Walmart, Amazon and Target).
Check with your employer’s human resources department to see what benefits are available. Even if there’s nothing specifically hardship-related, there could be some kind of subsidy for transportation, health or other perks that can reduce your overall expenses and give you some financial breathing room.
Credit Card Hardship Programs
Some credit card companies offer hardship programs that temporarily lower the amount you owe when you’re going through a financial challenge. You may qualify for a lower interest rate so you can continue making payments. The benefit is that you stay current on your account, avoiding late fees and late payments on your credit report.
However, you must contact your credit card company to apply for a hardship program. Additionally, you may need to prove the details surrounding your financial hardship with documentation. Covered events include:
- Illness
- Job loss
- Divorce
- Natural disaster
No matter what kind of hardship you’re facing, reach out to your creditor for help so you can keep your credit card in good standing.
Payday Loans
A payday loan may sound like a personal loan, but it’s actually quite different. Loan amounts are small, typically under $500. There’s no credit check required and funding is fast, but the full loan amount is due in an incredibly small window of time, usually within two weeks (on your next payday). Often, you may have to give permission for the lender to automatically withdraw the amount from your bank account on the due date.
In lieu of an interest rate, you’re charged a flat fee based on the loan amount, usually $10 – $30 per $100 borrowed. That’s a huge percentage of the amount you’re actually borrowing, especially compared to other options such as a personal loan or credit card. If you can’t afford the payment, you can roll over the loan, but you will be charged those fees again. Many people get stuck in an extremely expensive cycle of debt when they roll over payday loans.
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Eligibility For Hardship Loans
Each of the programs above has its own eligibility requirements. For a personal loan, it’s important to understand lenders’ qualification guidelines, since your finances may look different when you’re going through financial hardship.
- Credit: You’ll need a qualifying credit score in order to qualify for a loan because it assures lenders that you’ll make your payments on time. The minimum usually ranges between 610 and 640.
- Existing debt: Lenders review your current debt load to see how much more debt you can reasonably afford.
- Income: Your income is also used to determine how much you can afford to borrow. Your debt-to-income ratio compares how much of your gross monthly income goes toward minimum debt payments.
- Employment: Lenders may verify your employment to confirm your income and make sure you’re still working. If your hardship is caused by a job loss, you may not qualify for the loan.
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Is A Hardship Loan Right For You?
How do you know if a hardship loan is right for you? Start with the urgency of your situation. Are you just stressed out right now, or will this issue persist for some time? Next, consider steps you can take before looking at financing: negotiating bills, applying for a credit card hardship program, exploring community assistance or maxing out your benefits at work.
Once those resources are exhausted, look at your financing options if you haven’t experienced a job loss. Determine the minimum amount you’d like to borrow and make sure you have a clear repayment plan for the loan terms. Also, compare loan offers from multiple lenders so you get the best deal possible.
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The Bottom Line: Navigating Life With Hardship Financing
When a financial emergency occurs, explore all of your options before jumping into any high-cost financing. You may have other resources available before applying for a hardship loan. Once those are maxed out, weigh the urgency of the crisis with the cost of a loan to get back on your feet without overburdening your budget.
Ready to compare personal loans from multiple lenders? See options from Quicken Loans today.
Lauren Ward
Lauren Ward is a writer with over a decade of experience covering financial topics for businesses and publications. Her work has also been featured in major publications such as U.S. News and World Report, CNN, Business Insider, The New York Post and Bankrate. Her expertise includes real estate, mortgages, small business, insurance and more.
