Loans

What Is a Hardship Loan?

A financial setback can occur unexpectedly and for a multitude of reasons. If you are struggling to pay your bills, 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?

A hardship loan is any type of loan that helps a consumer currently going through financial hardship. Multiple lenders now market hardship loans as coronavirus hardship loans, as many people are struggling during these unprecedented times. 

Hardship loans offer different repayment terms and amounts depending on the type of loan you apply for and the lender. 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 a financial hardship by using the equity in your home as collateral. The amount you can obtain 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. 

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 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. 

The Bottom Line

A hardship loan is a beneficial financial option when you need help staying on top of your bills. During these unprecedented times, it’s easy to feel like you are losing control of your finances. A hardship loan can help you get back on your feet if you need quick financial relief. However, carefully compare multiple loan terms before submitting a loan application. Look at the interest rates and the repayment schedule. Choose hardship loans based on your preferred repayment terms to ensure you can meet the repayment expectations. 

References:
How Does a Hardship Loan Affect Your Credit?
How to Take 401(k) Hardship Withdrawals