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What is a hardship loan?

what is a hardship loan

What is a hardship loan? A hardship loan is any type of loan that helps a consumer currently going through financial hardship. Hardship loans offer different repayment terms and amounts depending on the type of loan you apply for and the lender.
A financial setback can occur unexpectedly and for a multitude of reasons. If you are currently dealing with past due bills or other debt, know that you are not alone. In fact, according to a CNN report, household debt balances have set a record high, reaching $16.05 trillion!1

For people searching for loans to help pay bills when you can’t make ends meet, it may be a good idea to consider a hardship loan. But what exactly is a hardship loan? Learn what distinguishes a hardship loan and how to qualify. 

What Are Hardship Loans?

Below are a few examples of financial hardship loans available. 

Personal Loans

A personal loan is a short or long-term loan that provides eligible borrowers with a lump sum. You can obtain personal loans from a bank or credit union or choose to work with online lenders. If you’re considering loans like CashNetUSA, a personal loan is a great option that allows you to pay off borrowed money through monthly installments. You can apply for an unsecured or secured personal loan, although most lenders offer unsecured personal loans. Getting approved for a personal loan depends mainly on your credit score and monthly income.

Home Equity Loans

A home equity loan is a secured, high-value loan for homeowners. Also known as a second mortgage loan, a home equity loan allows you to borrow money during financial hardship by using the equity in your home as collateral. The amount you can obtain from a home equity loan depends on your home’s market value and how many mortgage payments you have left to pay. 

Payday Loans

A payday loan is a short-term loan meant to help eligible borrowers cover expenses between pay periods. Payday loans are convenient because almost anyone can get instant payday loans online or in person. However, payday lenders expect you to repay the total loan amount and interest fees within two weeks. This fast turnaround can be hard to meet for many borrowers, who end up having to roll over their loans repeatedly. 

Auto Title Loans 

An auto title loan, or auto equity loan, is a secured loan that uses a borrower’s car as collateral. Auto title loans can provide large loan amounts quickly. This type of loan has flexible qualification requirements since approval greatly depends on the market value of the car and the amount of equity in it. However, the financial institution can repossess and sell the car if you fall behind on loan repayment. 

What To Consider When Looking Into Hardship Loans 

AspectDescriptionConsideration for Borrowers 
Application Process The steps required to apply for a hardship loan. – Some lenders offer online applications, while others might require in-person visits. – Documentation needed can vary. 
Approval Time How long it takes to get the loan approved. – Some options like payday alternatives loans might offer quicker approvals than traditional personal loans. 
Credit CheckWhether the lender checks credit history. – Not all lenders perform hard credit checks; some might do soft checks or none at all. 
Loan DurationHow long you have to repay the loan. – It’s essential to know the duration to plan repayments and avoid additional interest or penalties. 
Early Repayment Whether you can repay the loan before the due date without penalties. – Some lenders might charge fees for early repayment, while others encourage it. 
Extensions & Rollovers If the lender allows extending the loan duration or rolling it into a new loan. – Extensions can provide relief but might come with additional fees or higher interest. 
Collateral Requirement Whether you need to provide an asset as security for the loan. – Unsecured personal loans don’t require collateral, but secured ones might offer better terms at the risk of listing the asset. 
Impact on Credit Score How the loan might affect your credit rating. – Timely repayments can boost the score, while missed payments can harm it. The initial application might cause a temporary dip. 

Will a Hardship Loan Negatively Affect My Credit?

If you are struggling to get back on your feet, a hardship loan can provide fast financial relief. But during such a stressful period, you may worry about how a hardship loan can affect your credit score. 

Applying for any loan will ultimately affect your credit score in some way. When you submit a loan application, you give the lender permission to conduct a hard credit inquiry. A hard credit check lets a lender review your credit report to determine your creditworthiness. However, a hard inquiry will decrease your credit score by a few points. Some financial institutions don’t conduct hard credit checks, so ask your lender before submitting a loan application. 

You may have to apply with multiple lenders to get approval if you already have a low credit score. Too many inquiries can also negatively affect your credit score. Financial experts advise borrowers to avoid making more than six inquiries within one calendar year to prevent credit score damage.  

Your credit score can still be affected once you obtain a hardship loan. If your lender reports payments to the major credit bureaus, your score can fall if you accidentally miss a due date. The good news is that your poor credit history can significantly improve by ensuring you make on-time payments! 

Should I Apply for a Hardship Loan?

When you are doing your utmost to make ends meet, a hardship loan could provide you with fast emergency cash. You can pay unexpected funeral expenses or medical bills with the extra money. But before you submit a loan application, take a hard look at your finances and consider if you can afford the additional cost of a loan. 

Consider Your Finances

A fast loan can seem like a great solution if you are financially distressed. But can you afford the cost of a loan? If you are already struggling to make ends meet, adding another monthly bill to your expenses list can worsen your situation. Many online lenders offer payment calculators that let you calculate how much your monthly payments will be. Knowing how much you need to pay each month can help you decide if a hardship loan fits into your existing budget.

Consider the Repayment Terms

Hardship loans have different repayment terms, so it’s essential to consider which financial option best suits your current situation. 

Short-term personal loans offer small amounts that you must repay within two weeks to a few months. You will either pay in one lump sum or make a few monthly payments. Small-dollar loans are ideal if you only need a few hundred dollars to afford the cost of living alone. However, short-term loans like payday loans have high-interest rates that make the repayment process difficult. 

Long-term loans are paid over the course of a few months or years. Look into installment loans if you need a few thousand dollars to take back control of your life. You can make smaller monthly payments over a more extended period, but keep in mind that you will end up paying more money in interest fees.    

Alternatives to Hardship Loans

Hardship loans offer fast financial support but can cost a lot of money. If you cannot afford the additional cost of a hardship loan, there are alternative options for you to consider. 

Family Loan

A family loan is a short or long-term loan between two family members. If you are currently experiencing financial hardship, you can try requesting money from a close family member. 

Unlike loans from banks and credit unions, family loans do not require a minimum credit score or strict qualification requirements. In addition, family members often do not impose a strict repayment date. Suppose you have family members willing to lend you money during a tough financial period. In that case, this type of hardship loan is a great financial option that can help you save money on interest fees. 

If you experience additional financial issues after getting a family loan, you can talk to your family member. Often, family members are more understanding and lenient than financial institutions. If you don’t pay by the agreed-upon date, your credit score will not be further affected.  

401(k) Hardship Withdrawal

If you currently have a 401(k), you can withdraw money from your retirement account when you are short on cash. To get a 401(k) hardship withdrawal, you must prove to the IRS that you have an “immediate and heavy financial need.” A few qualifying situations for a 401(k) hardship withdrawal include specific medical expenses, funeral expenses, home purchase costs, and foreclosure avoidance costs. 

Check your 401(k) plan to see whether your financial institution allows early withdrawals for financial hardships. An early withdrawal can be beneficial when you have a lot of money saved for retirement. However, you may have to pay a 10% early withdrawal penalty fee based on how much money you withdraw. 

Defer Loan Payments

Are you making every effort to keep up with all your bills and simply want a moment of peace to get your finances in order? You can try asking your current lenders if they will allow a deferment. 

A deferment is an approved extension that allows you to avoid making payments for a specified period. Deferred payments can offer much-needed financial reprieve when unexpected issues throw your budget off course. Keep in mind that while you won’t have to make a payment, interest may still accrue on your existing loan. The amount of time you can get for a deferment varies per lender. Still, typically borrowers can defer payments for a month. 

Deferring payments does not affect your credit because the lender approved you to stop payments temporarily. If your lender reports payments to a credit bureau, the month with a skipped payment will be reported as “deferred.” But your credit score will be negatively affected if you miss paying by the deferred payment date. 

FAQ: Hardship Loans 

What are payday alternative loans?

Payday alternative loans are a type of loan offered by credit unions as an alternative to high-cost payday loans. They come with lower fees and more extended repayment terms, making them a more affordable option for those in need.

How do I get a hardship loan if I’m facing financial difficulties?

To get a hardship loan, you can approach credit unions, banks, or online lenders. Ensure you have all necessary documentation, such as proof of income and financial hardship, to expedite the application process.

Is there a difference between a secured personal loan and an unsecured personal loan?

Yes, while all unsecured personal loans are a type of personal loan, not all personal loans are unsecured. An unsecured personal loan doesn’t require any collateral, whereas a secured personal loan might require assets like property or a car as collateral. Secured loans like title loans will require the borrower’s vehicle title and other loans like home equity loans will use the borrower’s home as collateral. 

Why might someone choose unsecured loans over secured ones?

Unsecured loans are often chosen because they don’t require collateral. This means that if you default on the loan, your assets (like your car for title loans or your home for home equity loans) aren’t at risk. However, they might come with higher interest rates due to the increased risk for the lender.

Are the interest rates for hardship loans variable or fixed?

Hardship loans can come with either variable or fixed interest rates. However, many consumers prefer fixed interest rates because they remain constant over the loan term, making budgeting easier.

Do I need a bank account to apply for a hardship loan?

Most lenders require you to have a bank account, but not all do. They use it to check your financial stability and, if approved, to deposit the loan amount. It’s also typically used for the repayment process.

How does a credit union differ from banks when offering hardship loans?

Credit unions are member-owned and often offer more favorable terms, like lower interest rates and fees, compared to traditional banks. They might also be more understanding of your financial situation and offer payday alternative loans as a more affordable option.

Can I get a hardship loan from a credit union if I’m not a member?

Typically, you need to be a member of a credit union to access their financial products, including hardship loans. However, many credit unions have easy membership requirements, such as living in a particular area or working in a specific industry.

How do hardship loans impact my credit score compared to other types of personal loans?

Hardship loans, like other personal loan types, can positively or negatively impact your credit score. Timely repayments can boost your score, while missed payments can harm it. The initial application might also cause a temporary dip due to the hard credit inquiry.

Are there any additional fees associated with hardship loans from a bank or credit union?

While credit unions often offer lower interest rates, it’s essential to inquire about any additional fees, like application or origination fees, to understand the total cost of the personal loan.

A Word From CreditNinja About Hardship Loans 

A hardship loan may be a beneficial financial option when you need help staying on top of your bills. During unprecedented times, it’s easy to feel like you are losing control of your finances. A hardship loan may be able to help you get back on your feet if you need quick financial relief. 

However, CreditNinja suggests you carefully compare multiple loan offers before submitting an application. Look at the interest rates and the repayment schedule. Choose installment loans based on your preferred repayment terms to ensure you can meet the repayment expectations. CreditNinja also encourages you to seek out non-loan options, such as dipping into savings, borrowing from a friend or family member, or even reorganizing your budget to free up room in your finances, before applying for personal loans. 

References:
1. Americans’ debt surpasses $17 trillion for the first time | CNN Business
2. How Does a Hardship Loan Affect Your Credit?
3. How to Take 401(k) Hardship Withdrawals

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