Hardship Loans- What You Need to Know?
Trevor Mahoney is a financial services writer and content creator based out of Los Angeles, California. He holds a Bachelors of Science in Finance from Santa Clara University. In his free time, he enjoys hiking and lounging on the beach.
At a Glance
Sometimes, financial hardships are impossible to avoid. In a tight pinch, financial assistance can make or break your personal situation. This is where hardship loans come in. As a loan type geared towards special financial situations, they can potentially provide you with the monetary support you need to get back on your feet.
In this article, you’ll learn:
What are hardship loans?
Hardship loans are a special type of personal loan that are specifically meant for unexpected financial challenges. Hardship loans usually have more favorable loan terms than other types of loans and can be useful in situations such as the aftermath of the Covid-19 pandemic, medical bills, unavoidable housing repairs, unemployment, and more.
Hardship personal loan options
A hardship loan can be difficult to qualify for if you are going through financial difficulties, but there are a number of different types of hardship loans available:
1. Personal loans for bad credit
One of the largest factors in whether or not a lender will approve your loan application is your history with credit. A credit score leaving a lot to be desired can quickly result in the denial of a loan application. However, personal loans for bad credit exist that offer more favorable terms for a borrower. Keep in mind, though, that in return for these more favorable terms, you will likely be charged a higher interest rate. If you already have a poor history with credit, taking on a large amount of debt with a high interest rate likely isn’t the best strategy.
Learn more: Personal Loans for Bad Credit
2. Secured personal loans
As opposed to personal loans for bad credit which have higher interest rates, secured personal loans utilize collateral. Essentially, in return for a lump sum of money and more favorable APR, you will be required to offer some type of asset in return as collateral. If you default on your loan, the lender may be within their right to secure this asset for their own.
Related: Secured vs Unsecured Personal Loans
3. Joint or co-signed personal loans
Assuming you are unable to qualify for a hardship loan on your own, taking out a loan with a co-signer who has a strong credit history can help you get approved for the loan. Additionally, if your co-signer has a strong enough income background, you can receive more favorable loan terms as well.
Related: Personal Loans with a Cosigner
4. Credit Union personal loans
Along with banks and third-party lenders, credit unions are another common source for personal loans. The loan terms offered by credit unions are typically far more favorable than those offered by other financial institutions, but you might have to become a member of the credit union to take out the money.
Learn More: Credit Union Personal Loans
How can you get a hardship loan?
If the idea of a financial hardship loan is appealing to you, it’s worth learning about the process of applying for loans for financial hardship:
1. Take a credit check
First things first, you will need to check your credit score to better understand which lenders terms you will qualify for. By learning more about your credit score and history, you can better determine which type of hardship loan, such as a bad credit personal loan or secured loan, is right for you.
2. Get pre-qualified with lenders
Many lenders offer prequalification services that allows you to submit a portion of financial and personal information to see if you prequalify for the loan. A prequalification is not the same as a preapproval, but so long as none of the information you provided to the lender changes, there is a higher likelihood that you will be approved.
3. Compare multiple loan offers
When considering different hardship loans, never settle for the first loan that falls into your lap. Look at the terms of different offerings and compare factors such as the total loan amount, interest rate, APR, monthly repayment, and more.
Compare: Best Personal Loans
4. Submit a loan application with your preferred lender
After finding a lender who offers the best terms for what you need, make a decision and submit a formal application. Assuming you followed the above steps and prequalified for the loan, if it was an option, you can rest easier knowing that there is a better chance you will be approved.
5. Sign your closing documents
Finally, once you are approved for a loan application, you will need to sign all of your closing documents. This contract that you sign will go over all the important terms such as the length of the loan, amount being loaned, and more. Review all of these terms completely to ensure there are no hidden fees or anything else that wasn’t disclosed right away.
Alternatives to hardship personal loans
In the event that financial hardship loans aren’t right for you, there are loan alternatives you can consider:
1. A 401(K) hardship withdrawals
Under normal circumstances, removing funds from your 401(k) may not be allowed or a penalty fee will be applied. However, in the event of financial hardship there are occasional exceptions that may be allowed, but the funds you take out will still be taxable. Keep in mind, however, that all money taken out of your 401(k) is money out of your retirement pool.
Related: Should You Use a 401k Loan to Pay Off Debt?
2. Home Equity Loan and HELOC
An alternative to hardship personal loans is a home equity loan or a home equity line of credit. This type of debt involves taking out a lump sum of money or gaining access up to a certain amount of money, but the equity in your home serves as collateral. It’s important to be cautious with this type of loan, as a failure to repay what you owe can result in the loss of the equity put up as collateral.
Learn more: Home Equity Loan and HELOC
3. Peer-to-peer lending
Peer-to-peer lending can be an option to consider if you aren’t looking for an extremely large loan amount and need quick access to cash. In peer-to-peer lending, the middleman is removed, and lenders are connected directly to borrowers, typically through a website. Under this type of lending, interest rates are typically far higher due to the added risk.
Learn more: Peer-to-Peer Lending
4. Paycheck advance applications
Some employers may allow you to take an advance on your next paycheck if you present your financial hardship situation as reasoning. Not all employers allow this but take the time to speak with your employer prior to taking out a potentially unnecessary loan.
5. Borrowing from friends and family
Borrowing money from friends and family for emergency expenses is a double-edged sword. While there likely won’t be interest and your close friends and family will be flexible on when and how you repay them, the relationship with that person is at risk if you cannot pay them back. Be sure you trust the person loaning you money and are capable of paying them back.
There are several different types of financial hardships that can emerge over the years including, but not limited to:
- Medical expenses
- Change in your employment
- Natural disasters
- Unexpected loss of income
Beyond the above, a financial hardship can technically be any unexpected event or situation that places an abnormal strain on your finances.
Hard time loans, sometimes called hardship loans, are personal loans specifically geared towards financial hardship situations. Due to the emergency nature of this loan type, the terms of the loan are usually more favorable. This type of loan can be secured or unsecured, but the purpose of the loan is to solve unexpected financial challenges.
Yes, hardship loans can still be acquired if you are unemployed, so long as you are able to show that you can repay the loan. You may need to bring on a co-signer to the loan in the event your financial standing is not enough to be approved.
Hardship loans can affect your credit both positively and negatively. If you meet all your payments on time and in full, your credit history will build overtime and your score will slowly increase. However, if you start missing loan payments or allow the loan to go into default, your credit score and history will quickly deteriorate.
Given that most hardship finance loans are personal loans, the average amount you will be able to borrow is anything between $1,000-$100,000.
When you are in a financial pinch, hardship loans for bad credit, hardship secured loans, or a standard personal hardship loan can help. Just be sure to compare different loan offerings to be sure that you are receiving the most favorable interest rate and loan terms.