Experiencing financial hardship can make it difficult to maintain financial stability. Whether you’re dealing with a job loss, medical emergency, or some other unexpected life event, a hardship loan can help you get back on your feet.
It’s important to carefully consider your hardship loan options because they vary in terms, rates, and fees. Taking out any type of loan increases your long-term financial obligations, but some come with better terms and conditions than others. In this article, we’ll discuss what you need to know about hardship loans, including what they are, how you can get one with bad credit, and financing alternatives if you don’t want to take on additional debt.
What is a hardship loan?
A hardship loan is a loan that provides borrowers with funds during a difficult time. Hardship loans are often used for basic living expenses, debt repayments, and other essential costs. Most borrowers use hardship loans to bridge a temporary income gap or cover a financial emergency.
Lenders offer hardship loans that range from $1,000 to $100,000 and have loan terms of 1 to 7 years. Since hardship loans are meant to cover a temporary setback, they usually come with shorter loan terms than mortgages or other home equity products.
Depending on the lender, you could get approved within a few hours to a few days, and receive funds in less than a week. To qualify for a hardship loan, you’ll need to meet your lender’s criteria. Each lender has their own credit, income, and debt-to-income (DTI) thresholds.
You’ll notice that “hardship loan” isn’t a loan option listed on your lender’s website or brochures. That’s because a hardship loan is a general term used to identify a loan that can be used for financial hardship, it’s not a specific loan product.
Hardship loans for bad credit
Hardship loans come in many different forms. If you’re experiencing financial hardship and need money to cover important expenses, consider the following financing options.
Personal loans
Personal loans allow borrowers to access a lump sum of cash that they can use for a variety of personal expenses, such as medical bills, debt consolidation, and rent. Lenders don’t usually restrict how you can use personal loan funds. You can get a personal loan through a bank, credit union, or online lender.
Most personal loans have terms of 3 to 5 years, although some lenders allow terms as short as 12 months. Rarely do lenders extend a personal loan beyond 7 years. You can take out a personal loan with a fixed or variable interest rate. Annual percentage rates (APRs) on hardship loans can be anywhere between 6% to 36%. If you have less than ideal credit, be prepared to pay a higher rate.
Payday alternative loans
Payday alternative loans (PALs) are small, short-term loans offered by federal credit unions that are more affordable than traditional payday loans. Traditional payday loans often come with high interest rates and fees that make it difficult to keep up with loan payments.
PALs, on the other hand, are designed to help borrowers quickly cover emergency expenses without accumulating high-interest debt or paying absorbent loan fees. Borrowers can receive PAL loans for loan amounts of $200 to $2,000 on repayment terms of 1 to 12 months. To qualify, borrowers need to have been a member of the credit union for at least a month and meet other financial criteria.
Peer-to-peer loans
Peer-to-peer (P2P) loans are non-traditional loans provided by individual investors to borrowers online. Investors and borrowers can meet on P2P lending platforms and negotiate the terms and conditions of their loan agreement.
The lending platform assigns the borrower a risk grade based on their credit score, credit history, and other financial factors. Lenders use this risk grade to decide whether or not to fund the borrower for the amount they need. P2P loans are paid back in fixed, monthly installments and have interest rates between 6.99% and 35.99%.
401(k) loan
A 401(k) loan is a loan that allows you to borrow money from your retirement savings. Borrowers can borrow up to 50% of their vested balance, capped at $50,000. Repayments are made through payroll deductions over the next five years.
Interest rates on 401(k) loans are usually 1 to 2 percentage points higher than the prime rate at the time of borrowing. However, the interest rate on a 401(k) loan is usually still lower than the rate on a credit card or personal loan.
Home equity loan
A home equity loan is a loan that allows homeowners to tap into their home equity. Home equity loans provide borrowers with a lump sum of cash upfront at a fixed rate. Borrowers can usually take out 85% of their home’s value, minus their mortgage balance. Lenders offer home equity loans with terms of 5 to 30 years.
To qualify, you need to have at least 20% home equity, a credit score of at least 620, and a debt-to-income (DTI) ratio of at least 43%. However, it might be possible to get a home equity loan with bad credit.
HELOC
A home equity line of credit (HELOC) is a way to borrow against the equity in your home in the form of revolving credit. HELOCs work similarly to a credit card, but usually come with larger credit lines and lower interest rates. Borrowers can withdraw funds up to a certain limit for the first 5 to 10 years of a HELOC.
After the draw period is over, borrowers can no longer withdraw funds and begin paying back the HELOC principal. The interest rates on a HELOC are variable and interest payments begin in the draw period. HELOC qualifications are usually the same as home equity loan qualifications.
Hardship loan alternatives
If you prefer not to take on additional debt, there are other ways to access funds during a difficult time. Consider the following hardship loan alternatives when you need money to cover essential expenses.
401(k) hardship withdrawal
A 401(k) hardship withdrawal allows 401(k) holders to use their 401(k) funds early under certain conditions. Unlike a 401(k) loan, these funds don’t need to be paid back; they’re simply removed from your 401(k) account. However, 401(k) hardship withdrawals come with strict rules – if the funds are not for an approved hardship, and you’re under 59 ½, you could face steep tax penalties.
The IRS permits hardship withdrawals in the event of an immediate and heavy financial need, such as a funeral, medical emergency, or eviction notice. 401k hardship withdrawals can sometimes be used for college tuition and home repairs, depending on your employer or plan administrator.
You’ll need to discuss 401(k) hardship withdrawals with your plan administrator and ideally, a tax and retirement professional. Taking funds from your 401(k) can have implications for your ability to retire, so make sure you plan for replenishing your nest egg.
Home equity investment
A home equity investment (HEI) from Point provides homeowners with a unique opportunity to tap into their home equity. Similar to a home equity loan, HEI borrowers receive a lump sum of cash upfront. The difference is, instead of paying back the loan in monthly installments, you provide Point with a portion of your home’s equity in the future.
HEIs can be settled when the owner sells or refinances their home within 30 years of the agreement. HEIs have no income requirements, making them ideal for times of financial hardship. Additionally, you can qualify for an HEI with a credit score of 500 or higher – so credit challenges are not a problem.
Government grants and programs
State governments provide financial assistance to their residents via grants and other programs. Residents can request funds to cover the cost of housing, food, utilities, medicine, and daycare with local county and city agencies. Here are a few programs you might qualify for:
- Unemployment Insurance (UI): Provides temporary financial assistance to workers who have lost their jobs through no fault of their own. To continue receiving unemployment funds, you need to be actively looking for a job.
- Low-Income Energy Assistance Program (LIHEAP): Provides financial assistance to low-income households to help them cover the cost of heating and cooling their homes.
- FEMA Disaster Assistance: Provides grants and low-interest loans to families and individuals affected by natural disasters. These funds can be used for temporary housing, home repairs, and other expenses incurred as a result of a natural disaster.
Special considerations for hardship loans for bad credit
Unfortunately, the world of personal finance is full of bad actors looking to take advantage of people who have fallen on tough times. This can take the form of offering financial tools with exorbitant interest rates that will only worsen your hardship – or even outright scams. Here are a few special considerations when seeking hardship loans for bad credit:
- Do your research – Dig into every company and product you find online. Spend time on review sites, read testimonials, and ensure everything is above board.
- Take the time to understand all the terms, conditions, and fees – It’s easy to disguise immense costs with complicated language and hidden fees. Get confident in your ability to understand a loan offer. Know the difference between an interest rate compounded daily, monthly, or annually. Understand closing costs, late fees, and what you’ll spend on interest over the lifetime of the loan.
- Avoid products known for predatory practices – Payday loans, car title loans, and other similar short-term products entice borrowers in desperate need with their lax qualification requirements. However, the exploitative interest rates, rollover costs, and other fees can turn a financial hardship from bad to awful.
- Comparison shop – If you are seeking hardship loans for bad credit, you may be tempted to take the first offer that comes your way, especially if your need is urgent. However, comparing offers from multiple lenders will set you up for a much quicker financial recovery.
Frequently asked questions
What qualifies as a hardship loan?
A hardship loan is any loan that helps someone facing a moment of financial difficulty. Personal loans, payday alternative loans (PALs), peer-to-peer loans (P2Ps), and home equity products can all be considered hardship loans. There are no set standards for the terms a loan needs in order to be a hardship loan – these vary lender-by-lender.
How do I claim financial hardship?
You can claim financial hardship by submitting a formal request to defer or lower your monthly payments with your creditors. Include documentation that proves your financial hardship, such as unemployment records, medical bills, or past-due rent notices.
Do you pay back a hardship loan?
Yes, hardship loans need to be repaid. Loan terms, interest rates, and borrower criteria vary by lender.
How do you qualify for a hardship loan?
Qualifying for a hardship loan looks very similar to qualifying for any other type of loan. You’ll need to complete an application and then go through an underwriting process, where the lender will make sure that you fit their requirements, including credit, income, and any potential restrictions on how you will use the funds.
How can I get a loan when no one will approve me?
It can be very frustrating to apply for loans when your financial circumstances make it difficult to qualify. Here are some tips for improving your chances:
- Explore products targeted toward individuals with a broader range of credit scores, such as peer-to-peer loans or Home Equity Investments.
- Do everything you can to improve your application chances, including reviewing your free credit report for any discrepancies, taking on more hours or getting a second job to increase your debt-to-income ratio, and finding a cosigner with a stronger credit score.
- Reach out to institutions where you have an existing banking relationship, especially smaller banks or local credit unions. An existing financial relationship can increase your approval odds.
Does the government give out hardship loans?
While you may be eligible for certain grants or services from your local, state, or federal government, the government is not in the business of providing hardship loans. If you are going through a financial hardship, you should make sure you are utilizing whatever government assistance you may qualify for.
Final thoughts on hardship loans for bad credit
Hardship loans are available for borrowers with bad credit. However, if you’re already experiencing financial difficulty, you might not want to take on additional debt. At the end of the day, a hardship loan still needs to be repaid. Consider alternative forms of acquiring funds, such as an HEI from Point.
Weather the storm of financial hardship with a Home Equity Investment from Point. Borrowers enjoy no monthly payments, flexible credit evaluations, and the ability to use the funds as they need. Explore Point’s HEIs here.
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