What is a hardship loan?
A hardship loan is a loan to cover an unexpected financial shortfall, either because your expenses went up or your income went down. Hardship loans are not like other loans that are designed to meet an expected or planned need (like a car loan or a business expansion loan). A hardship loan is for situations where you can’t pay your bills.
What types of hardship loans are available?
Hardship loans come in many varieties to meet different needs. Here are a few examples.
401(k) hardship withdrawal
Under certain circumstances, if you have an immediate and heavy financial need, you may be able to borrow from your own 401(k). Your employer must offer this feature. Also, the money can only be used for:
- Certain primary residence purchase and repair expenses, or to prevent eviction or foreclosure
- Certain medical expenses
- Tuition and fees (up to 12 months)
- Burial and funeral expenses
Payday loan
A payday loan is a type of short-term cash advance. Most are set up to be repaid automatically from your bank account on your next payday. Payday loans are considered “predatory.” That means the loan terms are abusive and unfair to you, the borrower.
The typical payday loan offers quick money at very high prices (but you may not realize how expensive they are when you take the loan).
Most payday loan borrowers get trapped in a cycle of debt because it can be very hard to repay the loan plus all the fees by the due date. Even if you pay off your loan, doing so may leave you short on funds for the next month, so you have to take another loan. According to Pew Charitable Trusts, the average borrower ultimately pays $520 in fees to repeatedly borrow $375. It can be hard to stop relying on payday loans once you start the cycle.
You should avoid payday loans because they are very costly but rarely your only option. Here are two alternatives that may be easy to access:
Credit union. Check with your local credit union (especially if you’re already a member) to find out if they offer a payday loan alternative (PAL). (See the link to our PAL guide above.) This is a payday advance at a much lower cost than what you’ll pay a storefront payday lender.
Cash advance app. You can also sign up for an app that offers a free cash advance or very low cost cash advance. Cash advance apps can help you access between $200 and $500, to be repaid on your next payday. This type of cash advance is generally interest-free, but may have a fee between $1 and $14.
The catch with these alternatives is that you’ll need to set up your account in advance, typically 30 to 60 days before you need the money.
Emergency home repair loan
It costs money to own a home. Besides the mortgage, insurance, taxes and homeowners association (HOA) fees, you’ll also face maintenance and repair costs over time. When your water heater decides to go kaput, you may need to come up with a couple thousand dollars to have it replaced. And you’ve got to act fast, because you’re taking cold showers in the meantime.
Options for emergency home repairs include:
- Home equity loan or home equity line of credit: You’ll need to have equity to borrow against.
- Credit card or credit card cash advance: You’ll need to have sufficient available credit.
- Personal loan: You’ll need to qualify. We’ve written a guide to help you learn how to get a personal loan.
Medical or veterinary care loan
Unexpected medical expenses are a leading cause of financial hardship. The first step you should take is to contact the healthcare provider to ask for a discount off your balance. They may also be willing to set up a payment plan that works for your budget.
If you know you will have an upcoming medical expense, you can consider a medical loan or medical credit card. Often, this type of medical expense loan is free if you are able to make every loan payment on time. Be careful, though. Medical financing usually comes with deferred interest. If you don’t pay off the entire balance by the end of the loan term, you will have to pay interest on the entire balance, even the portion you’ve paid off.
You can finance pet medical care in a similar way. Some credit programs are available just for this purpose.
Other options include using a credit card or getting a personal loan.
Personal loans
A personal loan can be taken for just about any reason, including a financial hardship. This is an installment loan. Your monthly payment and interest rate will be the same for the entire loan term.
To get a personal loan, you’ll need to meet whatever qualification criteria the lender requires, including their minimum credit score. The interest rate usually depends on your credit score, the loan amount, and the loan term. Shorter repayment periods often come with a lower interest rate.
It doesn’t matter if you go with an online lender or the bank in your neighborhood. But shop around to get the best interest rate and lowest fees.
If your credit score is not high enough to get the personal loan or to get an interest rate that makes the loan affordable, you might be able to improve your options by applying for a secured personal loan. To get a secured loan, you will need collateral. For example, if you own a Certificate of Deposit (CD) account (a special savings account that pays higher interest but restricts access to your money for a period of time), you may be able to borrow against it. Other things you can use as collateral for a personal loan include:
- Your house
- Your car or boat
- Jewelry or other valuables
- Insurance
Deferment and forbearance
In some cases, you might be able to handle your financial emergency by working with a current lender rather than finding a new one.
Mortgage payment forbearance is sometimes an option, especially if your income was affected by the pandemic. With loan forbearance, you get the benefit of deferred payments but interest still accrues. The catch with most mortgage forbearance programs is that when you resume payments, you will be expected to make up all of your missed payments (in a payment plan, not a lump sum). It’s not a good option for most people. You might be better off finding a hardship loan to help you cover the payment, rather than rack up a large bill that will increase your monthly financial obligations.
Call your mortgage servicer to find out the details of any relief program or forbearance plan they offer. Also, depending on your income and your loan details, you might even qualify for a loan modification that would permanently reduce your monthly payment.
Car loans and personal loans, as a rule, do not offer deferment or forbearance options.