Personal Loans
Get back on track: How a hardship loan can help you overcome financial struggles
Updated Jul 28, 2024
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Key takeaways:
A hardship loan could help you get on your feet after a crisis.
Before taking on a new loan to get you through a hardship, you may want to ask your creditors if payments can be put off for a time
Some hardship assistance doesn’t have to be paid back.
Everyone goes through hard times now and then. Life's financial curveballs can raise your stress level, so let's take a breath, step back, and consider the options.
Are you having trouble paying your bills and meeting your financial responsibilities because of a recent crisis? If so, a hardship loan could help you recover and get back on your feet.
Let's take a closer look at hardship loans and how they could help when you're facing money problems. We'll explain how they work, who can get them, and what you need to consider before applying.
What is a hardship loan?
A hardship personal loan could provide you with money to pay your bills when you're facing temporary financial difficulties. You could use a hardship loan to cover expenses or bridge a financial gap caused by an emergency situation. Most hardship loans don't require collateral (you don’t have to own something valuable that you could borrow against).
Let’s say you face an unexpected medical bill or major car repair. A hardship loan could help you cover these costs in a pinch. In simple terms, a hardship loan could act as a safety net during hard times.
Reasons for needing a hardship loan
A drop in income, an emergency, or an unforeseen expense are the main reasons for needing a hardship loan. Here are some common situations when someone might need hardship assistance:
Unexpected medical expenses
Funeral expenses
Required expenses to avoid foreclosure or eviction
Home repair after a natural disaster
Emergency car repair
Sudden loss of income
Being a victim of violent crime, domestic violence, or identity theft
Personal hardship loans
Personal loans can be used for many things, including financial hardship. They're usually unsecured loans, which means you don't have to own something of value to borrow against. Approval is based on your credit score and finances. The interest rate is fixed, meaning you'll have regular payments every month for a set number of years.
How personal hardship loans work
Personal hardship loans are designed to offer a helping hand during unexpected financial difficulties. Here's how they work:
Apply: The application process is usually straightforward, often done online.
Receive the funds: If approved, you'll receive the money in a lump sum, possibly within just a few days.*
Repay the loan: You'll repay the loan amount in equal monthly installments over a set period, typically a few months to a few years. You’ll also pay interest, and there might be additional fees.
*Funding time varies and can take as long as a few weeks.
Examples of people who might need a hardship loan
Sarah's medical emergency
Sarah faced a sudden health crisis requiring emergency surgery. Despite having health insurance, the out-of-pocket costs for her treatment and recovery period quickly accumulated, threatening her financial stability. Her provider offered her a substantial discount if she could pay the entire bill soon after receiving care. So Sarah got a personal loan to cover the medical expenses.
John's sudden loss of income
John, a loyal employee for over a decade, was suddenly laid off due to downsizing. He had to figure out what to do in the face of job loss with a family to support and a mortgage to pay, and the loss of income was a big financial challenge. He watched his savings dwindle as he searched for a new job. Both of his children were enrolled at a small private school run by the church where they were members. The tuition was low, but it wasn’t free. John was considering pulling them out when he finally landed a new job (at a better salary, to boot). He decided to take a personal hardship loan to cover the tuition, because he knew he could pay it off and build his savings back up. The hardship loan provided a crucial lifeline during this difficult transition, and it gave John the opportunity to provide a stable education for his children.
Maria's car repair
Maria relies on her car for daily commutes to work and to take her children to school. When her car broke down unexpectedly, the repair costs were more than she could afford on her tight budget. Facing the prospect of losing her transportation and potentially her job, Maria turned to a hardship loan. This allowed her to pay for the repairs promptly, making sure her family's routine could continue without major disruptions.
Benefits and drawbacks of hardship personal loans
Pros | Cons |
Quick access to money | Not everyone qualifies |
Flexible | A new loan might not relieve your financial situation |
Usually no collateral needed | Loan fees |
Lower credit scores might be okay | You might not qualify for a loan as large as you want |
Here's a breakdown of the pros and cons of a hardship personal loan:
Pros explained:
Quick access to money. Many loans are funded within a few days after approval.
Flexible. You could use the funds for almost any expense.
Usually no collateral needed. Most personal hardship loans are unsecured, which means you don’t need to own something valuable that you could borrow against.
Lower credit scores might be okay. If you’re experiencing a hardship, your credit standing might have suffered. Some types of hardship loans are designed for borrowers with lower scores.
Cons explained
Not everyone qualifies. If your hardship has caused you to fall behind on your bills, or if you’ve lost your source of income, you might not qualify for a new loan.
A new loan might not relieve your financial situation. Borrowing money increases your debt burden, which may be a hardship in itself.
Loan fees. Most lenders charge a fee for making the loan.
You might not qualify for a loan as large as you want. Loan qualification partly depends on your income and your current debt situation. If you’re experiencing a hardship, you might have a hard time qualifying for the amount you need to address the hardship.
Other types of hardship loans
Many types of hardship financing exist, but here are some of the most common:
401(k) hardship withdrawal
The IRS allows retirement plans to give savers the opportunity to take hardship distributions (withdrawals) for an immediate and heavy financial need. The withdrawal must be for an amount necessary to satisfy that financial need.
Not all retirement plans allow hardship withdrawals, so you'd want to check with your plan administrator or your human resources department.
For plans that allow hardship withdrawals, the employer determines if the requirements are met, but the IRS spells out the conditions. A large optional purchase (like a boat) wouldn't be allowed. But the IRS does allow you to take a hardship withdrawal to cover living expenses if you’re experiencing an extended period of unemployment. Other uses are also allowed.
The hardship withdrawal is taxed at 10%, and you can withdraw additional money from the 401(k) to pay the taxes.
Under normal circumstances, if you withdraw money from your 401(k) before you’re 59 ½ years old, you also have to pay a 10% early withdrawal penalty. Some hardships, however, qualify for an exemption.
The withdrawn amount can't be repaid to the retirement plan. It's not a loan. Withdrawing money early from a 401(k) account means you'll permanently lose the opportunity to grow that money.
401(k) loan
A 401(k) hardship loan allows you to borrow money from your own retirement savings, with interest, and repay it over a specific period. Whether you can borrow from your 401(k) depends on your employer’s plan. It can be a helpful solution for unexpected financial needs, but it does take money away from your future retirement and any earnings that money could have generated.
One major downside to these loans is that if you separate from your employer for any reason, the loan may become due in a short period of time. If you get laid off, for example, you might have to fully repay the loan within 90 days. If you can’t, the loan would convert to an early withdrawal and would be subject to taxes and penalties.
If you borrow from your 401(k), you’ll pay taxes twice on those funds. You’ll have to repay the loan with money that you’ve already paid taxes on, and you’ll pay taxes again when you withdraw the funds in retirement.
Employer hardship loan
Some employers offer hardship loans to employees. Federal employees, for example, can get assistance through the Federal Employee Education and Assistance Fund, or FEEA.
FEEA offers a confidential, no-interest loan of up to $1,500 in the form of a check made out to the employee's creditor and sent to the employee to deliver. FEEA will not pay student loans or credit card bills, or make checks out to employees directly.
Disaster assistance
The U.S. Small Business Administration (SBA) offers low-interest disaster loans to businesses, homeowners, and renters in declared disaster areas following events like severe storms or wildfires. An SBA disaster loan can be used to cover losses not covered by insurance or the Federal Emergency Management Agency.
Home equity loans
A home equity loan or home equity line of credit is a way homeowners can borrow to cover a large expense. These loans tend to have higher limits and longer repayment terms than personal loans. The amount you can borrow depends on your home equity. Equity is the current market value of the home minus the amount you still owe on your mortgage.
Loan deferment
Some mortgage companies and student loan providers allow you to skip loan payments if you've lost your job or are going through a crisis, such as a natural disaster.
Your mortgage lender may offer forbearance, which means pausing or reducing your mortgage payments for a limited time while you build back your finances.
Federal student loans have many repayment options, including skipping payments or recalculating the payment to a lower amount based on your income and family size. In some cases, you'll still be responsible for making payments to cover the interest while your loan is in deferment.
Benefits and drawbacks of hardship loans
Benefits
The money can help you pay your bills and get through a hard time, such as a job loss.
Many hardship loans don't require collateral.
A fixed interest rate means a steady payment amount until the loan is repaid.
Hardship loans can help you avoid high-interest credit card debt.
Drawbacks
Even if you're able to put off debt repayment, it won't go away. And in some cases it'll grow larger during your hardship.
Taking on new debt won't always solve the hardship. It's possible to end up worse off.
Alternatives to hardship loans
Before formally applying for a hardship loan, call the companies you owe money to and ask whether they'll let you put off payments for a month or more while you get back on your financial feet. Credit cards, utilities, mortgage lenders, and phone companies may give you a break, though interest may still accrue on credit card balances and loans.
Other alternatives to hardship loans include:
Government assistance: The Department of Health and Human Services offers the Supplemental Nutrition Assistance Program (SNAP) nationwide. This is a government subsidy for food. Find the SNAP office in your area.
Debt resolution: If you've fallen behind or are struggling to make the minimum monthly payments on your debts due to financial hardship, a debt resolution program may be a good option. Debt resolution is negotiating with your creditors to accept less than the full amount that you owe. You could get out of debt faster and for less money than by making your minimum monthly payments. A debt resolution company will typically ask you what your hardship is—they'll need to give your creditors a reason to consider settling your debts.
Alternatives to hardship loans
Before formally applying for a hardship loan, call the companies you owe money to and ask whether they'll let you put off payments for a month or more while you get back on your financial feet. Credit cards, utilities, mortgage lenders, and phone companies may give you a break, though interest may still accrue on credit card balances and loans.
Other alternatives to hardship loans include:
Government assistance: The Department of Health and Human Services offers the Supplemental Nutrition Assistance Program (SNAP) nationwide. This is a government subsidy for food. Find the SNAP office in your area.
Debt resolution: If you've fallen behind or are struggling to make the minimum monthly payments on your debts due to financial hardship, a debt resolution program may be a good option. Debt resolution is negotiating with your creditors to accept less than the full amount that you owe. You could get out of debt faster and for less money than by making your minimum monthly payments. A debt resolution company will typically ask you what your financial hardship is—they'll need to give your creditors a reason to consider settling your debts.
Written by
Aaron Crowe is an Achieve contributor. He is a freelance journalist who specializes in writing about personal finances. He has worked as a reporter and editor at newspapers and websites for his entire career.
Reviewed by
Betsalel is a contributing writer for Achieve. Passionate about helping people improve their finances. He worked in mortgage banking, private banking, and personal financial coaching. When he is not working, he loves running and spending time with his family.
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