What Are Hardship Loans And When Should You Use One?

Even if you plan well, unexpected expenses can happen.

Things like medical emergencies, car accidents, or sudden travel can make it hard to pay your bills.

Luckily, many lenders offer hardship loans to help during tough times.

Let’s learn what hardship loans are, their good and bad points, and when you might want to get one.

Discover what hardship loans are and when they can be useful.

Learn about the benefits and drawbacks to make informed financial decisions.

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What Are Hardship Loans And When Should You Use One? Photo Source (Freepik)

What Is A Hardship Loan?

A hardship loan helps people in financial crises caused by emergencies or income gaps.

It can pay for unexpected expenses like medical bills or car repairs, as well as essentials like food and rent.

These loans usually have small amounts, low interest rates, and short repayment times.

Some also allow delayed payments.

Where Can You Get A Hardship Loan?

Borrowers who need help covering short-term expenses have different loan options.

Not all banks offer hardship loans, but small banks and credit unions are popular choices.

If you’re borrowing from your 401(k) or other investments, you need to work with your employer or account manager.

Common Types Of Financial Hardship Loans

Consider the pros and cons of different hardship loans to find the best one for your needs.

Unsecured Personal Loans

An unsecured hardship loan is a type of personal loan that doesn’t need collateral.

Lenders decide how much you can borrow based on your credit score and finances.

If your credit score is low, it might be hard to qualify because of strict rules.

Although you won’t lose any property if you miss payments, the loan could have higher interest rates and APR because it’s not backed by collateral.

Late or missed payments can still hurt you. Lenders usually give you the money within 7 – 10 business days, and some can do it in 24 hours.

Secured Personal Loans

A secured loan uses something valuable like a car or stocks as collateral.

This makes it easier for people with lower credit scores to get the loan.

Secured loans might have lower interest rates, longer terms, and bigger loan amounts.

But if you miss payments, the lender can take your collateral to cover their losses.

Home Equity Loans

Homeowners can use home equity loans for home improvements or to consolidate debt.

If you’re in a tough spot and have a lot of equity in your home, you can turn some of that equity into cash.

Home equity loans have fixed interest rates, usually lower than personal loan rates, and longer terms for easier repayment.

However, since your home is used as collateral, it’s like having a second mortgage, adding another payment to manage.

Defaulting on the loan could lead to foreclosure.

401(k) Hardship Withdrawals

If you have a 401(k) retirement plan, you might be able to borrow money from it for short-term needs.

Employers offer this option for specific purposes like home repairs, avoiding foreclosure, paying medical bills, funding education, or covering funeral costs.

Before you decide, talk to your plan administrator to make sure you qualify.

Borrowing from your retirement account can help you avoid high-interest loans or credit card debt.

You don’t need to meet lender requirements or have your credit checked.

However, you might face penalties or taxes for early withdrawal.

This could affect your retirement plans if you don’t repay the loan quickly.

Payday Alternative Loans

Payday loans are known for trapping people in debt cycles.

Luckily, some credit unions and online lenders offer payday alternative loans (PALs).

These are short-term loans, typically lasting a year or less, with low borrowing limits.

PALs can help you quickly pay unexpected bills.

They might be cheaper than unsecured personal loans.

However, their short repayment period can mean higher monthly payments than you planned for, and their APRs can be very high compared to home equity or secured personal loans.

Peer-To-Peer Loans

A peer-to-peer (P2P) loan is when you borrow money from someone you don’t know.

Here’s what you need to know:

  • P2P loans usually have low interest rates.
  • They can be a choice for people with little or no credit history because they have fewer strict rules than regular loans.
  • If you don’t pay back a P2P loan, it can hurt your credit score.
  • Some platforms charge a lot for their services.
  • To make sure things are safe, some P2P lenders have rules about who can lend money.
  • P2P lending has become more popular, but lenders might be careful about lending to people who might not pay them back. Just because you can use a P2P lending platform doesn’t mean you’ll get enough money for an emergency.

Should You Use An Emergency Hardship Loan?

After learning about different hardship loans, think about whether you need one.

Your decision depends on your situation and goals. If you need a small amount of money quickly, a hardship loan might be helpful.

However, if you have bad credit, hardship loans can be expensive.

It can be hard to qualify with a low credit score and a history of not paying on time.

And even if you do qualify, you’ll likely have to pay higher interest rates.

Are There Alternatives To Hardship Loans?

If you can’t get the options we talked about earlier, try these:

  • Employee assistance programs (EAPs): Some employers help with medical bills, fixing damage from fires or floods, or paying for funerals. You might need to show proof, like a letter explaining your money problems.
  • Nonprofit organizations: Some groups that don’t make money help people with low incomes during money emergencies.
  • Government grants and loans: The federal and state governments have programs to help with things like food, childcare, housing, medicine, or paying for utilities.

How To Get A Hardship Loan

To apply for a hardship loan, follow these steps:

  1. Check Your Credit: Know your credit score and check for mistakes or fraud.
  2. Check Prequalification: Make sure you meet the lender’s requirements.
  3. Compare Rates and Terms: Compare interest rates and types of loans.
  4. Submit an Application: Fill out a form and give financial information.
  5. Finalize Your Loan: Your application is reviewed, and if approved, you get the loan.

Conclusion

Hardship loans can pay for things like medical care and home repairs.

Look into different loans to find the best one for you.

Talk to a financial advisor for advice that fits your situation.

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