What are hardship loans?
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Receiving funds right away can give you some relief, but it can also contribute to your financial burden, since you need to repay the money. Before you borrow one of these loans, consider the pros and cons and understand how they work.
How do hardship loans work?
Hardship loans are designed to meet immediate and urgent needs if you’re facing financial hardship, such as job loss.
You can use the money to pay for necessities like groceries and bills, or for unforeseen circumstances like an expensive medical bill. Hardship personal loans are paid out as a lump sum upfront, and you repay the loan in fixed monthly installments, with interest. The funds may be deposited in your bank account or paid via check. Personal loans are typically unsecured, meaning they don’t require collateral, but you can also find secured personal loans, which are often easier to qualify for.
These loans are offered by online lenders, banks, and credit unions. However, hardship loans are also offered by the government and other organizations. For example, the Federal Employee Education and Assistance Fund offers hardship loans of up to $1,500 to federal civilian or postal employees who have been working for the government for at least one year.
How much can you borrow with a hardship loan?
While personal loans often range from $1,000 to $50,000 or more, this may not always be true of hardship loans. These loans are usually granted in smaller amounts, and the loan terms are often shorter.
It’s important to only borrow what you need and agree to a repayment schedule that’s realistic for your situation. Also remember to consider the lender’s total loan costs, which could include fees on top of the amount you’re borrowing, plus interest charges.
How to qualify for a hardship loan
Requirements vary depending on where you’re applying for a hardship loan, so it’s important to confirm specific eligibility requirements directly with the lender. Generally speaking, you may need to meet these qualifications:
- Have a current source of income or a qualifying emergency such as a sudden job loss, death in the family, or another crisis
- Meet certain credit score requirements (though some lenders specifically cater to borrowers with low credit scores)
- Have a valid bank account
Some hardship loan offers are temporary and tied to economic events, such as the coronavirus pandemic. These loan options may have specific requirements and deadlines that you must meet.
How to get a hardship loan
The process of getting a hardship loan is often not very different from getting a traditional personal loan. Here are some basic steps:
- Compare loan options: Shop around to compare lenders and their hardship loan options. Some lenders allow you to prequalify on their website without affecting your credit. This can give you a better idea of the terms you may be offered.
- Complete the application: Once you’ve compared loans, decide which option will be best for you and start the application process. Most banks, credit unions, and lenders allow you to apply online.
- Submit supporting documents: The lender may ask you to provide supporting documentation such as your pay stubs and proof of financial hardship.
- Review loan terms: If your application is approved, the lender will send you the loan terms to review. Be sure you understand any fees you may have to pay, as well as the repayment schedule.
- Receive funds: Once you sign your loan agreement, you’ll simply need to await the funds. Many lenders can fund your loan by the next business day, and some can even provide same-day funding.
Pros and cons of hardship loans
While receiving money in your time of need can be a relief, there are downsides to consider as well.
Pros
- Flexibility: Hardship loans can be used to help with everything from paying everyday bills to covering medical expenses.
- Many lending options: Several types of lenders offer hardship loans, so you can compare loan terms to find the one that’s best for you.
- Options for bad credit: Even if your credit score is low, some lenders may still be willing to work with you.
Cons
- Shorter terms: Hardship loans may have shorter repayment terms since they’re meant to bridge a temporary gap.
- Smaller borrowing amounts: If you need to borrow a larger amount of money, a hardship loan may not provide enough funding.
- May not qualify: Some lenders have very specific requirements, so you may not be able to get a loan.
Will a hardship loan affect your credit?
A hardship loan may have a temporary negative effect on your credit if the lender runs a hard credit check. However, this will likely only have a small impact on your credit score for a year.
On the other hand, if you make your payments on time, this can improve your credit, since your payment history makes up 35% of your FICO score.
What are some alternatives to hardship loans?
Hardship loans may not be the best option for everyone. Here are a few alternatives to consider:
- Borrowing from friends or family: If a loved one is comfortable with loaning you money, you could avoid high loan fees and interest charges. With this option, you’ll want to make sure you agree to the terms in writing to avoid any confusion.
- Home equity loan: This option allows you to borrow against the equity in your home. With a home equity loan, you receive a lump sum upfront and make fixed monthly payments. However, you must meet certain eligibility criteria, and you risk losing your home if you fail to repay the loan.
- HELOC: A home equity line of credit (HELOC) is similar to a home equity loan, but instead of receiving a lump sum of cash, you get a line of credit you can borrow from as needed (up to a limit). Keep in mind that a HELOC also uses your home as collateral.
- Hardship programs through credit card issuers: If you’re experiencing financial hardship, it’s a good idea to contact your credit card issuer to find out if it offers hardship programs. You may qualify for lower monthly payments and interest rates, and your credit card company may waive any late fees or membership fees.
- 401(k) hardship distribution: If you have money in your 401(k), you may be able to use a 401(k) hardship distribution. This allows you to access your money immediately. However, you’ll face several consequences for taking a distribution, including paying an additional 10% tax if you’re under the age of 59 ½.
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