Hardship loans: how to borrow during setbacks

What is a hardship loan?

Hardship loans are a type of loan for anyone who is experiencing a financial setback or crisis, whether from a sudden job loss, medical event or other situation that causes a lack of income. They can be used for a variety of purposes, including paying bills, buying food or even emergencies.

During the height of the COVID-19 pandemic, hardship loans and programs gained popularity. These loans allowed applicants to borrow a lump sum of money, like a personal loan, but the requirements were less strict for borrowers needing financial assistance.

Lenders and financial institutions still have hardship loans in place, but the qualification criteria might be stricter. For instance, you might have to call or inquire in person rather than apply online. And some lenders might have restrictions on what you can use your loan for.

Make sure to pay attention to repayment terms and interest rates before getting a hardship loan. Terms may be shorter and rates may be higher than with other loans.

Unfortunately, not all hardship loan lenders have the best interests of borrowers in mind. “Some lenders can use very aggressive rates that can quickly increase the total amount of repayment,” said David Blaylock, a certified financial planner and head of financial planning at Origin, a financial planning platform.

He emphasizes paying attention to the total amount of interest on the loan and how it is calculated. “While repayment terms for hardship loans are typically shorter in nature, beware of any loan where the repayment time is weeks and not months,” he said.

Although these loans are designed to help borrowers in tight money situations, you’re still taking on debt. Ask yourself if adding a new source of debt to your finances will give you the boost you need or will make budgeting harder. Don’t take on the debt if it will further complicate your financial situation.

» MORE: Best personal loans for fair credit

What situations qualify for a hardship loan?

Any situation that can cause you to have a sudden decrease in income that prevents you from meeting your basic living expenses may qualify you for a hardship loan. Some of these qualifying hardships include:

• Sudden unemployment
• Unexpected medical emergencies
• Starting long-term medical treatments, like chemotherapy
• Damage to your primary residence
• Funeral costs for a spouse, child or dependent

Other situations, such as military deployment, incarceration, divorce or natural disaster, may also qualify you for a hardship loan. Business owners looking for a hardship loan will need to check with their local or state government to determine eligibility.

Note that some types of hardship loans will have stricter qualifications than others. For example, a 401(k) hardship withdrawal has limits on what is considered a hardship and how much money you can borrow. Make sure you read the fine print before applying for one of these loans to increase your odds of approval.

» MORE: Guide to getting a personal loan with a co-signer

Different types of hardship loans

If you’re considering a hardship loan, it’s important to know your options. There are several types of loans, and you should consider the pros and cons of each one before applying.

• Emergency loans: These are fast loans that can cover a multitude of emergencies. Some lenders may even send your funds an hour after closing. However, the annual percentage rate (APR) on these can be high. Depending on your credit score, APRs can be up to 36%.
• Personal loans: You can use a personal loan for many financial needs, and the fixed term helps you know how much to budget each month to repay your loan. Each lender sets its credit score requirements, so applicants with bad credit might be denied. However, if you’re approved, you can use the funds for almost any expense.
• 401(k) hardship withdrawal loans: This type of withdrawal is limited to immediate and significant financial hardship, such as a medical bill. You cannot take out extra funds to cover the tax costs that come with this withdrawal. Unlike other 401(k) loans, hardship withdrawals are not repaid back into your account or rolled over to another individual retirement account (IRA).
• Payday alternative loans (PAL): Offered by select credit unions, these loans are a safer alternative to payday loans. You can use a PAL for any expense, but $2,000 is the maximum amount you can receive. Instead of paying interest, borrowers pay a high application fee – typically $15 to $35 per $100 borrowed.
• HELOC: If you have equity in your home, you can access it to cover your emergencies. Once your home equity line of credit (HELOC) is approved, you will have access to funds immediately and on an as-needed basis. However, unlike a personal loan, HELOCs come with a variable rate of interest, so your rates could go up or down over time.
• Borrowing from family/friends/crowdfunding: Don’t be embarrassed to share your financial reality with close friends and family. They might have creative, helpful solutions or be willing to lend you funds to help you meet your needs. Alternatively, using a crowdfunding platform allows more people to chip in what they can. Fees to use crowdfunding range between 5% and 12%.

Hardship loans to avoid

Even when you feel desperate for financial assistance, it is best to stay away from predatory lenders. Although getting approval is relatively easy, predatory loans come with rates and terms that are very burdensome.

Whenever possible, refrain from these types of loans:

• Payday loans
• Title loans
• Pawnshop loans
• Car title loans
• No-credit-check loans

How to apply for a hardship loan

Applying for a financial hardship loan is very similar to applying for a personal loan or auto loan.

1. Check your credit score: Before you start, know where your credit score stands. Hardship loans might have a lower credit score requirement, but expect a higher interest rate if you have a lower credit score.
2. Get pre-qualified: Before you commit to a loan, you can see how much money you can receive and the APR by getting pre-qualified. This can help you decide if a hardship loan is your best option.
3. Compare options: Once you know your rate, you can see if other lenders or types of hardship loans are more affordable.
4. Apply: Completing the full application will require more information, such as your income and information about the qualifying hardship. During this step, the lender will do a hard credit inquiry, which will impact your credit score.
5. Sign documents: After your application has been approved, you will be able to review your terms in the loan agreement. If you agree to the terms, you can sign the agreement — the last step before you receive your funds.

Alternatives to hardship loans

If you apply and are rejected for a hardship loan, or you’d rather not take on the payment associated with a loan, you might still be able to get assistance. There are many resources available through employers, counties and states, and local financial institutions. You can also try any of the following actions:

• Call your creditors: As soon as possible, contact all of your creditors to explain your financial hardship. Do not wait until your bill is past due; the sooner you contact them, the more willing they might be to work with you. Additionally, utility companies might be able to refer you to local programs that can help cover your bills.
• See which loans can be deferred: Some lenders have special deferment or forbearance options that will temporarily pause your payment responsibilities. Make sure you contact the lender to find out what steps you need to follow.
• Research local assistance programs: Ask your local community center or religious institution what programs are available. Many cities have free grocery events or clothing drives that will help you get the resources you need.

Bottom line

A hardship loan can help you financially when the unexpected happens. Before taking out a loan, consider exploring free resources and assistance available in your area or through family members and friends. If you do need a financial hardship loan, choose a reputable lender offering manageable terms; avoid predatory lenders that have high APRs and require repayment in a short time frame.