Get back on track: How a hardship loan can help you overcome financial struggles

A hardship loan could help you get back on your feet after a job loss, a medical emergency, or another financial setback. Life's financial curveballs can raise your stress level, so let's take a breath, step back, and look at your options.

If a recent crisis has made it hard to keep up with your bills and financial responsibilities, a hardship loan could help you recover.

Let's take a closer look at them 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.

Money troubles are common, and they don’t always come with much warning. Just 63% of U.S. adults say they could cover an unexpected $400 expense using cash or its equivalent, according to the Federal Reserve’s most recent survey of household finances.

Types of hardship loans

Hardship loans generally fall into three categories, and each works a little differently.

• Hardship personal loans. Banks, credit unions, and online lenders offer these unsecured or secured loans to help you cover a gap in income or pay an unexpected bill.

• 401(k) hardship withdrawals. Some employer-sponsored retirement plans allow a withdrawal for an immediate and heavy financial need, as defined by the IRS.

• Employer or nonprofit assistance. Some employers and nonprofit organizations offer emergency loans or grants to help employees or members through hardship.

This article focuses mainly on hardship personal loans, since they’re the most widely available option. We’ll also cover the 401(k) and employer options.

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 financial 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 generally 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, depending on the lender.

Who can apply for a personal hardship loan

A personal hardship loan is open to most adults dealing with a financial setback, whether that's a job loss, a medical bill, or another unexpected expense. This includes borrowers with less-than-perfect credit, since some lenders design hardship loans specifically for lower credit profiles.

Lenders typically review your credit history, income, and existing debt as part of the application, and some ask about the reason for your hardship. Your credit score and financial situation help determine your rate and terms, but they don't have to be perfect for you to apply.

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.

Mike's tragedy

Mike was devastated by his dad's sudden death. Mike works full-time and has a small emergency savings account but was shocked to discover that he had nowhere near enough to cover burial costs and a small funeral. Mike took a personal hardship loan to help him cover his dad's final arrangements. It wasn't an easy time, but having the money to make it through helped.

Benefits and drawbacks of hardship loans

Pros

• Quick access to money

• Flexible

• Usually no collateral needed

• Lower credit scores might be OK

Cons

• Not everyone qualifies

• A new loan might not relieve your financial situation

• Loan fees

• You might not qualify for as large a loan as you want

Here's a breakdown of the pros and cons of a hardship loan.

Personal hardship loan pros explained

Quick access to money. If you find yourself in a tight financial situation, the time it takes to receive the money could be critical. Many loans are funded within a few days after approval.

Flexibility. 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. You typically qualify based on your creditworthiness and financial situation.

Lower credit scores might be okay. If you're experiencing a hardship, your credit score might have suffered. Some types of hardship loans are designed for borrowers with lower scores. If you're interested in a hardship loan, you could start by prequalifying with Achieve Personal Loans, then compare a few other lenders to find the best terms and interest rate, no matter what your credit score is.

Personal hardship loan cons explained

Not everyone qualifies. If your hardship has caused you to fall behind on your bills, or if you’ve lost your job, 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. Chances are, you wouldn’t be taking out a hardship loan if you had the cash you needed to get you through. Before filling out a loan application, work through your household budget to make sure you’ll have enough for regular, on-time payments. You don’t want to take on a debt that makes life more difficult.

Loan fees. Most lenders charge a fee for making the loan. You could pay an origination fee ranging from 1% to 10% of the amount you borrow. That means on a $10,000 loan, you could pay a fee of $100 to $1,000. Some lenders charge even higher fees, which makes it doubly important to loan shop before settling on a lender.

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 some trouble qualifying for the amount you need to address the hardship.

Impacts your credit score. As long as you make regular monthly payments, your credit report will reflect your positive financial habits. But if your hardship makes it difficult for you to keep up with your payments, that’s what your credit report will show.

Hardship loans and bad credit

A financial hardship can touch every part of your life, and your credit scores might already reflect the strain. That's a normal part of going through a tough stretch, and it doesn't close the door on borrowing.

Many lenders offer personal loans to borrowers with fair credit, which typically means a FICO Score of 580–669, though each lender sets its own cutoffs. Some lenders focus specifically on working with applicants whose scores have taken a hit.

If you fall into this group, you could prequalify with Achieve Personal Loans to explore your options without affecting your credit score. A soft inquiry does not lower your credit score. Prequalification gives you an estimate of the rate and terms you could receive, so you can compare loans before committing. Final terms depend on full underwriting and could differ from the estimate.

A co-borrower with stronger credit is another path worth exploring. A co-borrower shares the loan and has equal access to the funds, and their credit profile could help you qualify for better terms.

No-credit-check loans typically carry higher costs, fees, or rates. If a lender advertises no credit check at all, compare the total cost carefully against lenders that do check credit, because the savings from a lower rate could far outweigh the convenience.

The bottom line: a lower credit score doesn't have to keep you stuck. Take it one step at a time, and start by finding out where you stand.

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. 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 as regular income 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 $2,000 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 federal government offers several hardship assistance programs for people affected by natural disasters and other emergencies.

• The U.S. Small Business Administration (SBA) offers low-interest disaster loans to businesses, homeowners, and renters in declared disaster areas following severe storms or wildfires. An SBA disaster loan could be used for losses not covered by insurance or the Federal Emergency Management Agency (FEMA). You don't have to be a business owner to qualify.

• United State Department of Agriculture (USDA). If you're a farmer or rancher in a county that's designated a primary disaster area, you may be eligible for a USDA disaster assistance program. If a storm destroys at least 30% of your crop production, kills livestock, or damages buildings, you might qualify for a loan.

• Federal Housing Administration (FHA). If your mortgage is backed by the FHA and you live in a declared disaster area, you may be eligible for mortgage assistance or financial help for repairs or rebuilding your home. And if you need a mortgage to rebuild or buy a new home, the FHA makes it possible to get the money you need without a down payment.

Home equity loans

A home equity loan or home equity line of credit lets homeowners borrow to meet a large expense. These loans tend to have higher limits and longer repayment terms than personal loans. Your home serves as collateral (guarantees the loan), which lowers the financial risk for the lender. That's why home equity loans and HELOCs typically carry a lower interest rate compared to other borrowing options.

The amount you can borrow depends on how much equity you have in your home. Equity is the market value of your home minus whatever you still owe on your mortgage.

Let's say your roof is nearing the end of its life and you don't have the cash for a replacement. A home equity loan could help you use your equity to borrow the funds you need.

Loan deferment

Some lenders allow you to skip loan payments if you lose your job or are experiencing a crisis, such as a natural disaster. Imagine there's another pandemic and your employer shuts down until the worst of the outbreak passes. A loan pause may just give you the financial breathing room you need to get by until you can get back to work. The practice is called forbearance, and it means pausing or reducing your payments for a short time while you get back on your feet.

If you don't have enough money to cover your bills, first take inventory of which loans could be eligible for forbearance. Possibilities include your mortgage, auto loan, student loans, credit cards, and personal loans. Once you know which bills are eligible, create a budget excluding them so you know how much you'll need each month to make it through.

Benefits and drawbacks of hardship loans

Benefits

• The money could help you pay bills. Not only does stress feel miserable, but it can even cause physical ailments. Having enough money to cover your expenses and get through a hard time may help ease that anxiety.

• Many hardship loans don’t require collateral. Not having to come up with (or risk) collateral could simplify the loan process.

• Fixed interest rate: Having a fixed rate means you know exactly how much you’ll have to pay each month until the loan is repaid.

• No credit card debt. Hardship loans can help you avoid having to turn to high-interest credit cards.

Drawbacks

• The longer the term, the more interest. It could be tempting to take a longer loan term to keep payments low. But doing so means paying more in interest over time (compared to paying the debt off faster).

• New debt won’t always solve the hardship. It’s possible to end up worse off. Let’s say you’re already carrying debt and this new loan causes you to tighten your belt to an uncomfortable degree. Perhaps it would have been better to look for other ways to relieve your financial distress.

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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 card issuers, 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 relief: If you’ve fallen behind or are struggling to make the minimum monthly payments on your debts due to financial hardship, a debt relief program may be a good option. Debt relief 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 relief company will typically ask you what your hardship is—they’ll need to give your creditors a reason to consider settling your debts.

Comparing hardship loans and personal loans

How to apply for a hardship loan

Applying for a hardship loan usually follows a similar process across lenders.

1. Review your finances. Add up your expenses and figure out how much you actually need to borrow. A clear picture of your budget can help you avoid taking on more debt than you need.

2. Check your credit. Review your credit report so you know what a lender will see when you apply.

3. Gather your documents. Most lenders ask for proof of identity, proof of income, and proof of address. Some may also ask for documentation related to your hardship.

4. Submit your application. The lender reviews your information and lets you know if you’re approved. Funding times vary by lender, though many hardship loans are funded within a few business days of approval.