Financial emergencies are among the most stressful situations we (and we all go through) experience.
When you are looking for a difficult loan, it may be because you are temporarily unable to meet your basic needs. This is the kind of situation that requires quick and conscientious help at a cost that won’t get you trapped in a cycle of debt. This article can be a starting point when looking for a challenging loan option that might be right for you.
What is a hardship loan?
A hardship loan is a loan to cover an unexpected financial shortfall, either due to your high expenses or low income. Distress loans are not like other loans designed to meet anticipated or planned needs (such as a car loan or a business expansion loan). A hardship loan is for situations where you cannot pay your bills.
You can learn more about some challenging loan types by reviewing these guides we’ve prepared:
- Emergency Loan Guide
- Coronavirus hardship loan guide
- Unemployment Loan Guide
- The alternative guide to a payday loan
Next, if you decide that you need to apply for a loan, start with our list of the best personal loan lenders. We’ve reviewed pricing, qualification criteria, reputation, and other factors to shortlist the resources that may be able to help you.
What types of hardship loans are available?
Distress loans come in many varieties to meet different needs. Here are some examples.
401(k) hardship withdrawal
Under certain circumstances, if you have an immediate and heavy financial need, you may be able to borrow from your 401(k). This benefit must be offered by the employer. Also, the funds can only be used for:
- Expenses for purchasing and repairing certain basic housing, or to prevent eviction or foreclosure
- Certain medical expenses
- Tuition and fees (up to 12 months)
- Burial and funeral expenses
A payday loan is a type of short-term cash advance. Most of them are set up to be paid automatically from your bank account on the next payday. Payday loans are considered “predatory”. This means that the terms of the loan are offensive and unfair to you, as a borrower.
A typical payday loan offers fast cash at very high rates (but you may not realize how expensive it is when you take out the loan).
Most payday loan borrowers fall into the debt cycle trap because it can be very difficult to repay the loan plus all fees by the due date. Even if you pay off your loan, it may cause a shortage of funds for the next month, so you have to take another loan. According to Pew Charitable Trusts, the average borrower ultimately pays the $520 in fee to borrow $375 more frequently. It can be hard to stop relying on payday loans once the cycle begins.
Payday loans should be avoided because they are very expensive but they are rarely your only option. Here are two easily accessible alternatives:
credit union. Check with your local credit union (especially if you’re already a member) to see if they offer an alternative to a payday loan (PAL). (See the link to our PAL guide above.) This is a payday advance at a much lower cost than you would pay a storefront payday lender.
Cash Advance Application. You can also sign up for an app that offers a free cash advance or a very low cost cash advance. Cash advance apps can help you reach between $200 and $500, to be paid off on the next payday. This type of cash advance is generally interest-free, but there may be fees ranging from $1 to $14.
The advantage of these alternatives is that you will need to set up your account in advance, usually 30 to 60 days before you need the money.
Emergency Home Repair Loan
Owning a home costs money. Besides mortgage fees, insurance, taxes, and homeowners association (HOA) fees, you’ll also encounter maintenance and repair costs over time. When your water heater decides to switch, you may need to get a few thousand dollars to replace it. And you have to act fast, because you are taking a cold shower in the meantime.
Emergency home repair options include:
- Home Equity Loan or Line of Credit for Home Purchase: You will need to obtain shares to borrow.
- Credit Card or Credit Card Cash Advance: You will need to have sufficient credit available.
- personal loan: You will need to qualify. We have written a guide to help you learn how to get a personal loan.
Medical or veterinary care loan
Unexpected medical expenses are a major cause of financial hardship. The first step you should take is to contact your healthcare provider to request a deduction from your balance. They may also be willing to set up a payment plan that fits your budget.
If you know you will have medical expenses coming, you can consider getting a medical loan or medical credit card. This type of medical expense loan is often free if you are able to pay off each loan on time. Be careful, though. Medical financing usually comes with deferred interest. If you do not pay off the balance in full by the end of the loan term, you will have to pay interest on the entire balance, up to the part you paid.
You can fund pet medical care in a similar way. Some credit programs are available for this purpose only.
Other options include using a credit card or taking out a personal loan.
A personal loan can be obtained for almost any reason, including financial hardship. This is an installment loan. Your monthly payment and interest rate will be the same for the entire term of the loan.
To obtain a personal loan, you will need to meet any qualification criteria the lender requires, including their minimum credit score. The interest rate usually depends on your credit score, the loan amount, and the term of the loan. Shorter repayment periods often come with a lower interest rate.
It doesn’t matter if you go with an online lender or a bank in your area. But you can shop for the best interest rate and lowest fees.
If your credit score is not high enough to get a personal loan or to get an interest rate that makes the loan affordable, you may be able to improve your options by applying for a secured personal loan. To get a secured loan, you will need collateral. For example, if you have a Certificate of Deposit (CD) account (a special savings account that pays higher interest but restricts access to your money for a while), you may be able to borrow for it. Other things you can use as collateral for a personal loan include:
- your home
- Your car or boat
- Jewelry or other valuables
delay and patience
In some cases, you may be able to handle a financial emergency by working with an existing lender rather than finding a new one.
Sometimes taking on mortgage payments is an option, especially if your income has been affected by the pandemic. With forbearance on the loan, you can take advantage of deferred payments but the interest is still due. The problem with most mortgage bearing programs is that when payment resumes, you are expected to make up all the missed payments (in the payment plan, not a lump sum). It is not a good option for most people. It may be better for you to find a hard loan to help you cover the payments, rather than incurring a large bill that will increase your monthly financial obligations.
Contact your mortgage service for details of any relief program or bear plan they offer. Also, based on your income and loan details, you may qualify for a loan modification that would permanently reduce your monthly payment.
Auto loans and personal loans, as a rule, do not offer deferral or forbearance options.
When you’re financially stressed, debt forgiveness options may flicker off your TV. It is very easy to get drawn into programs that claim to help you settle your debts and get relief quickly.
To get off the point right away, you are unlikely to succeed in settling your debts for pennies on the dollar. Your credit score will be blown for years if it isn’t already low.
You will usually be asked to stop paying all of your bills and instead send one monthly payment to the debt forgiveness company. Once your bills are late enough, the company starts making low offers to your creditors. This process takes years and may or may not work. If the debt is settled for less than the debt owed, expect your creditors to report the exempt amount to the IRS as income, increasing your tax liability.
Other ways to help close the financial gap
In addition to searching for emergency funds, you can also seek help. Sometimes a quick phone call can temporarily erase a financial obligation. Reach out to all the companies you pay for and ask what kind of financial assistance they can provide during your ordeal. Your utility company may lower your rate temporarily. Your cell phone provider may allow you to pause your service for a month or two. Any forgiveness you get from creditors can reduce the amount of money you need to get through the hardship.