Hardship Loans and Alternatives

Find yourself in an unexpected financial bind due to a sudden setback? Consider a hardship loan if you need to borrow money in a time of adversity. This type of financing can provide quick cash when you need it most, possibly with better terms and a lower interest rate than other types of loans or credit.

Learn more about how a hardship loan works, how it’s different from a traditional personal loan, the advantages and disadvantages of a hardship loan, how to qualify and apply, and alternatives to consider.

Understanding hardship loans and how they work

A hardship loan is a special type of unsecured personal loan, which means you aren’t required to put up collateral like your home to secure the financing. Often, hardship loans offer more preferred terms than other types of financing. That’s because hardship loans may come with lower interest rates, deferred-payment options, and rapid funding, even if you are unemployed. The tradeoff is that the maximum amount you may be allowed to borrow could be lower than for other types of loans.

“Hardship loans” technically only came about in the wake of COVID-19, during a time when many Americans experienced significant challenges paying their bills due to illness, unemployment, and other factors.

“Hardship loans are not like other types of loans that are intended to meet an anticipated or planned need, like a car loan or a business expansion loan,” says Levon Galstyan, a certified public accountant and consumer-finance expert with Oak View Law Group. “A hardship loan is designed for situations where you cannot pay your bills, such as when you have high medical expenses, burial or funeral expenses, tuition and education costs, expenses incurred to avoid foreclosure or eviction, or home repairs following a natural disaster.”

Money received from a hardship loan can also be used for basic living expenses, like groceries, transportation, child care, rent, and mortgage payments.

“Hardship loans can often be used for anything the borrower wishes, but they are usually only granted in situations where a borrower would have an immediate need of the funds for a specific immediate purpose,” Ben Michael, an attorney with Michael & Associates, a law firm, explains.

Types of hardship loans

Hardship loans are offered via different names, such as a “coronavirus hardship loan.” If a lender doesn’t directly offer a hardship loan, there are other options to pursue, including:

• Bad-credit loan, which may be a good choice if you have a poor credit score.
• Secured, personal loan, which can be easier to qualify for because you will have to put up collateral to get approved.
• Payday loan, which serves as a kind of short-term cash advance, the funds of which must be paid back via your bank account by your next payday.
• Joint personal loan, in which you and another party sign the loan agreement and assume responsibility for the debt, which can be a worthy option if you have poor credit and can convince a cosigner with better credit to sign.
•  401(k) hardship withdrawal, which enables you to tap money from your 401(k) retirement savings.
• Emergency home-repair loan in the form of a home-equity line of credit (HELOC) or home-equity loan.
• Credit-card cash advance, assuming you have the  available credit.

Who can qualify for a hardship loan?

According to Ashley Morgan, a debt and bankruptcy attorney in northern Virginia, “you have to meet certain qualifications to be approved for a hardship loan, and you have to show evidence of your specific hardship.” Put another way, be prepared to provide to the lender proof of your adversity in the form of bank and financial statements, proof of income loss, or other types of substantiation.

“While a hardship loan is often customizable to your unique circumstances, you must also get permission from the lender for the explicit cost the hardship loan is used to cover,” notes Jake Hill, CEO of DebtHammer, a debt advisory. In other words, the lender will likely have a conservative cap on the maximum amount you will be allowed to borrow. Often, hardship-loan funds cannot exceed $5,000.

Every lender will have its own hardship-loan eligibility requirements. But in general, aim for a decent credit score (620 or higher), a relatively low debt-to-income ratio (40% or lower), and solid history of employment (although some lenders will still consider unemployed applicants).

How to apply for hardship loans

Hardship loans are available from many different types of lenders, including small banks, credit unions, and online-lending platforms. Most larger, traditional, banks, however, do not provide hardship loans.

The process of applying for a hardship loan is similar to the process for other types of financing. You can either apply online or in person at a brick-and-mortar bank, credit union, or other lending institution. Be prepared to provide different forms of paperwork, including paystubs, bank statements, and tax returns.

One of the benefits of a hardship loan is that, if you meet qualification requirements, you should be able to receive the funds relatively quickly. To improve your chances of getting approved, it’s smart to follow best practices before applying for a hardship loan.

“Obtain a copy of your three free credit reports and review them carefully. If you spot any errors or inaccuracies, work quickly to have them resolved,” suggests Galstyan of Oak View Law Group. “Also, look over the prequalification requirements for the loan. Once you’ve decided on the type of hardship loan you want to use, make sure you meet the lender’s requirements. Then, examine the rates and terms carefully. If you cannot decide between multiple lenders, run a cost comparison to see which loan is the most affordable.”

After you apply, your application will be reviewed by an underwriter before being approved.

Alternatives to hardship loans

As mentioned, lenders may offer financing specifically called a “hardship loan” or “coronavirus hardship loan,” often at a lower interest rate and with more advantageous terms (such as the option of deferred payments) and faster funding than you would get with other types of loans. But if you can’t find or qualify for this type of hardship loan, consider other options, such as a:

• Bad-credit loan
• Secured, personal loan
• Payday loan
• Joint personal loan
• 401(k) hardship withdrawal
• HELOC
• Home-equity loan
• Credit-card cash advance
• Personal loan from a friend or family member

“In my opinion, a 401(k) hardship withdrawal is a far superior option to a standard hardship loan or personal loan,” says Galstyan of Oak View Law Group. “The amount you withdraw is usually limited to the amount required to cover the expense. You are not required to repay the withdrawal, but the money from your retirement fund will be lost. Just be forewarned that, if you are under the age of 59½, you may be required to pay income taxes and a 10% early withdrawal penalty.”