What is a hardship loan?

Financial hardship loans can be used to cover a variety of expenses, like rent, mortgage payments, or medical bills, in a pinch.

What is a hardship loan?

A hardship loan is a loan intended to help its recipient pay for emergency expenses. Hardship loans can come from a financial institution, a friend, or a family member, and their terms will vary from lender to lender.

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Typically, hardship loans will only provide you with a small amount of money. They usually offer low interest rates and short repayment periods. Hardship loans can be applied to any emergency expense – for example, you become unemployed, but need to cover a pet’s surgery or major car repair. You can even use a hardship loan to pay for groceries or rent.

Types of hardship loans

There are many different types of hardship loans:

Unsecured personal loans

An unsecured personal loan is money you borrow for almost any reason and with no collateral. This means that if you don’t pay back your loan, the lender cannot repossess your property. For example, when you take out a mortgage, your home is the collateral – the lender will repossess your home if you don’t pay back the mortgage. An obvious benefit of this type of loan is that you don’t have to worry about your property being taken if you can’t pay.

However, they can be difficult to qualify for if you have bad credit, and lenders often set higher interest rates for these loans to protect themselves. With an unsecured personal loan, you can borrow anywhere from $1,000 to $100,000 depending on the lender and your credit score. It’s important to note that personal loans typically prohibit you from using the money to pay for college tuition, home down payments, or business expenses.

Secured personal loans

A secured personal loan requires collateral (one of your assets) to obtain the loan. This means that if you don’t pay back the loan on time, the lender can seize that asset – for example, if your car is the collateral, the lender would be able to possess it.

It’s typically easier for those with low credit scores to obtain a secured personal loan, which gives the lender a safety net if the loan isn’t repaid. For this reason, secured loans also usually have lower interest rates. With a secured loan, you can usually borrow up to $100,000 depending on your credit score and the lender.

Home equity loans

If you own a home, you can take out a home equity loan. These allow you to give some of the equity you have in your home to a lender in exchange for cash. Once you’re approved, you’ll get the money from the lender in a single payment. You’ll have a set number of years to pay back the loan, which varies from lender to lender, plus interest. Home equity loans typically come with a lower interest rate. However, because they use your home as collateral, the consequences of falling behind on repayment are pretty dire.

401(k) loans

This type of loan allows you to borrow money from your retirement savings. You’ll need to check if your employer’s plan offers this type of loan. With a 401(k) loan, you can sometimes borrow up to $50,000 in a 12-month period. You don’t have to pay taxes or penalties like you would if you simply withdrew cash from your 401(k). You usually get five years to pay back the loan. The downside is that if you leave your job in the meantime, you may need to repay the entire loan in a shorter time period.

401(k) withdrawals

A 401(k) withdrawal isn’t a true loan, but it is a way to quickly access cash if you need it. You won’t be required to pay back what you take out from the 401(k), but you’ll probably have to pay a 10% early withdrawal penalty.

Peer-to-peer loans

Peer-to-peer (P2P) loans happen through a peer-to-peer lending platform, where you can borrow money from anyone else on the platform. These platforms typically offer low interest rates. If you have a low credit score, you usually can still get a loan from a P2P lender. However, these loans will affect your credit score if you don’t repay them, and these platforms may have high service fees.

How to get a hardship loan

If you’re convinced a hardship loan is right for you, the next steps are pretty straightforward.

1. Collect your information.

Check your credit score to see which loans you will qualify for. You should have your ID and proof of address handy to share with lenders.

2. Compare your options.

Though you may feel pressed to get a loan as quickly as possible, take the time to compare different offers to find the right terms for you.

3. Complete an application.

Once you’ve made your decision, fill out an application. If you’re unemployed or have low credit, you may need to find a cosigner. It may take you a few days to hear back from the lender if the loan was approved.

Financial hardship is stressful, but you have plenty of options available to help you get through it. If a change in circumstances has you reconsidering your long-term financial goals, use a free template to retool your financial vision with ease.