Get back on track: How a hardship loan can help you overcome financial struggles
Key takeaways:
A hardship loan can 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.
If you're struggling to pay your bills and meet your financial obligations due to a recent crisis, a hardship loan might help you get back on your financial feet.
What is a hardship loan?
A hardship loan provides you with money to pay your bills when you're in financial hardship or have suffered a crisis.
Hardship loan terms vary among lenders, but generally, they're small loans with low interest rates and short repayment terms. Lenders may have eligibility requirements on top of the usual credit and income requirements, such as requiring proof of financial need or hardship. Most hardship loans don't require collateral.
Reasons for needing a hardship loan
A drop in income that doesn't allow you to pay your everyday expenses, an emergency, and other unforeseen expenses 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
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.
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 college tuition.
The hardship withdrawal is taxed at 10%, and you can withdraw additional money from the 401(k) to pay the taxes.
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 will permanently lose the opportunity to grow that money.
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.
Personal 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.
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.
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.
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.
Frequently asked questions
How to get a hardship loan from your 401(k)
The IRS doesn't allow hardship loans from your 401(k) account. To qualify for a hardship withdrawal, you need to have an immediate and heavy financial need, and the withdrawal must be for an amount necessary to satisfy that need. The withdrawal can’t be paid back.
Can I get a hardship loan with bad credit?
Yes, some loans are designed for people with lower credit scores. Lenders will consider your hardship, but your credit score and finances will also be reviewed, just as they would for any other type of loan. If you own your home, have sufficient equity, and need the loan to pay off other debts, you can apply for a home equity loan with a 600 credit score.
How much can I borrow with a hardship loan?
Loan limits vary by loan type and lender. Some hardship loans are limited to small amounts of around $1,000. You may be able to get more by proving that you have a bigger expense, such as a major medical event or a funeral.
Some hardship programs don’t specify how much can be borrowed. The IRS limits hardship withdrawals from a 401(k) to the amount necessary for an immediate and heavy financial need.
