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Hardship personal loans are designed for borrowers facing financial difficulties. Here is how they work, along with some other alternatives worth exploring.
The exact definition of a hardship loan can vary from one lender to another. Typically, hardship loans are similar to personal loans, but they tend to have low loan limits, relatively low interest rates, and short repayment terms because they are designed to get you out of immediate financial trouble.
Smaller banks and credit unions are more likely to offer a hardship loan, and you'll generally have to prove that you are facing genuine financial difficulties to access them.
If you're approved, you can use a hardship loan for a variety of purposes, such as to meet obligations like medical bills, to make other loan payments, or simply to pay everyday living expenses.
Hardship loans work much like other types of personal loans. You'll apply for the loan, usually online. If your application is approved, the lender will send you money in a lump sum, typically within a few days.
You then have to repay that money, typically in equal monthly installments, over several months or several years. In addition, you'll pay interest on the loan and sometimes fees.
Hardship personal loans differ from other types of personal loans in several ways. First, you'll usually have to prove you are in genuine financial trouble to qualify. The maximum amount you can borrow will likely be lower, and you'll have to repay the loan fairly quickly.
Your interest rate may be lower for a hardship personal loan than you would get on a regular personal loan.
In 2023, Investopedia commissioned a national survey of 962 U.S. adults who had taken out a personal loan to learn how they used their loan proceeds and how they might use such loans in the future. Debt consolidation was the most common reason people borrowed money, followed by home improvements and large purchases. Hardships were not high on the list, although medical bills, which came in fourth, probably qualified in some instances.
There are two basic types of hardship personal loans:
Unsecured personal loans are those that aren't backed by any collateral. This means that your lender can't repossess your assets if you fail to pay back the loan, but also that the lender is taking a larger risk on you. For that reason, you'll typically need a higher credit score or have to pay a higher interest rate in order to get an unsecured hardship loan.
Secured hardship personal loans, in contrast, are those that are backed by collateral. This makes them less risky for lenders, who can then offer them to customers with bad credit or give customers with good credit a lower interest rate. If you can't qualify for an unsecured personal loan, a secured hardship loan could be a good option.
As with any financial product, hardship personal loans have both benefits and downsides to consider.
Although hardship personal loans might seem like the logical choice in an emergency, you could find another solution that works better for your financial situation. Among the possibilities:
A hardship withdrawal is an emergency distribution from a tax-advantaged retirement plan. The Internal Revenue Service (IRS) permits these withdrawals in the event of "an immediate and heavy financial need." This type of special distribution may be possible from plans such as an individual retirement account (IRA) or a 401(k), provided that it meets certain criteria. In the case of workplace plans, employers aren't required to allow hardship withdrawals, and it is up to your employer to determine whether you qualify.
A hardship withdrawal will still be subject to standard income tax and may be subject to a 10% early withdrawal penalty for withdrawals made before age 59½ in some instances.
Bear in mind that if you take a hardship withdrawal from your retirement account, you will miss out on the interest that this money would have accrued had you left it in. So, it's worth thinking carefully about whether this type of withdrawal makes sense for you.
Regular payday loans tend to have extremely high interest rates and are illegal in some states because they are regarded as predatory lending. However, some credit unions and online lenders offer payday alternative loans (sometimes known as PALs) that are generally less expensive.
Payday alternative loans can be used to cover unexpected bills and are available to borrowers with bad credit. They are typically for $200 to $1,000, with repayment terms of one to six months. Payday alternative loans may come with a small application fee.
Peer-to-peer (P2P) lending enables individuals to obtain loans directly from other individuals via one of the various online platforms established for that purpose.
If you face financial difficulties and find it hard to qualify for other types of loans, P2P lending might be a good option. These loans tend to have less strict qualification requirements than standard personal loans and can also have relatively low interest rates. However, maximum loan amounts can be low, so they may not entirely cover an expensive emergency.
Other options to consider include:
The steps for obtaining a hardship personal loan are similar to those for a traditional personal loan, with a few key differences. Here's the basic process.
You do have to pay back a hardship loan, plus the interest it has accrued.
You'll usually receive the money from a hardship personal loan within a few days of being approved for the loan. If you are making a hardship withdrawal from your 401(k), it can take two to three days for the money to become available.
To get a hardship loan, you'll typically have to prove that you are in financial difficulty. You'll also have to meet the lender's specific requirements, which can include a credit score over a certain number.
If you fail to make payments on any secured personal loan, the lender can seize and sell your collateral.
Online research can be a good place to start. You can also review Investopedia's recommended list of the best emergency loans for bad credit to learn more.
A hardship personal loan could help you ride out a financial storm. These loans are generally offered by smaller banks and credit unions and tend to have lower interest rates, lower maximum loan amounts, and shorter repayment periods than a standard personal loan.
If you are facing a hardship, it's also worth looking into IRA or 401(k) hardship withdrawals, a home equity loan or HELOC, and any government or nonprofit grant programs for which you might be eligible.
