During a financial challenge, a hardship loan may be an option you should explore.
A hardship loan can be any money that is borrowed during difficult times, including a personal loan, equity financing, or a loan from a family member or friend. There are safe ways to borrow; however, taking on debt may add to your burden. Borrowers should explore all options before committing to another loan.
Financial hardship can add more stress to an already complicated situation. Hardship situations can range from someone in the household losing their job; a family member requiring expensive medical care or a vehicle breaking down.
Here are some options for hardship loans:
Payday alternative loans
Payday alternative loans are small-dollar loans available to members of some credit cards. If you are a member of a credit union or have a low credit score that offers payday alternative loans, it is one of your cheapest options for borrowing.
Typically, you have between one and 12 months to repay this type of loan.
Amounts for payday alternative loans can range from $200 to $2,000. These short-term, small loans can help you pay for unexpected expenses or small emergencies.
For these types of loans, you must be a credit union member. Your ability to repay the loan and your income are key factors determining whether you qualify.
Payday alternative loans can have annual percentage rates up to 28%.
Personal loans
Unsecured personal loans are offered by credit unions, banks, and online lenders to borrowers with all types of credit.
While some lenders offer secured personal loans, which require collateral like a savings account or a vehicle, these types of collateral can help you qualify for a better rate.
A low credit score doesn’t need to prevent you from qualifying for a personal loan; some personal loans are tailored to consumers with bad credit (considered 629 or lower FICO).
When borrowing for an emergency, a lender can fund a personal loan within a few days.
Unsecured personal loans can range from $1,000 to $100,000. They are for individuals whose credit score may have taken a hit but remain above 550. A personal loan can help with medical emergencies or home or car repairs.
Although each lender has different requirements, some credit unions and banks require you to be an existing customer to secure a loan. Borrowers with good or excellent credit typically can guarantee the lowest interest rates. Adding a co-signer with solid credit or income can improve the chances of qualifying. APRs on personal loans usually range from 6% to 36%. Some lenders may also charge an origination fee, often included in the APR.
Home equity lines of credit and loans
With a home equity line of credit or loan, borrowers take funds against the equity your home has gained. A home equity line of credit is an open credit line that comes in a lump sum to use as needed.
Accessing your equity to cover expenses during a hardship can be a risky option because you are using your home as collateral. You risk losing your home if you don’t repay the borrowed funds.
If your home value drops, you could end up owing more than what your home is worth. Home equity loans and lines of credit allow borrowers to borrow about 85% of the home’s value.
Borrowers should be comfortable using their homes as collateral for urgent or emergency needs, including home repairs.
To qualify, you usually need more than 20% equity in your home and have a 620 or higher credit score and a debt-to-income ratio of less than 40%. A lender will also require income verification and proof of employment.
401(k) hardship withdrawals
You may qualify for a hardship withdrawal if you contribute to a 401 (k). You should check your plan and determine what specific conditions are eligible. This type of withdrawal allows you to access the money you, and possibly your employer, have contributed to.
Withdrawals from 401 (k) accounts should only be made if exhausted all other possibilities. Hardship withdrawals can be used for expenses and emergencies, including home repairs, money to avoid eviction, medical bills, or college tuition.
The administrator or your plan ultimately decides whether you qualify, and you may have to offer an explanation why you can’t get funds elsewhere.
If you are under 55 or have lost your job, you could face tax penalties for withdrawing money from your 401 (k). You may still be charged a 10% tax penalty if you withdraw the money before 59 ½.
Borrowers should know that this option leaves you with fewer savings than retirement.
Avoid: payday loans
One hardship loan to avoid is a payday loan.
With payday loans, lenders may attract consumers because they require fewer qualification requirements. Some may lend funds regardless of your employment status.
Often, these require repayment of the entire amount within two weeks. This can lead to a cycle of debt if you have to borrow again when unable to make a payment.
With no-credit-check loans, lenders may offer borrowers with no or low credit scores a loan but may charge triple-digit interest rates to account for the risk the lender is taking on.
