What Are Hardship Personal Loans?

Hardship personal loans are designed for borrowers facing financial difficulties. Here is how they work, along with some other alternatives worth exploring.

What Are Hardship Personal Loans?

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.

How Hardship Personal Loans Work

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.

How Borrowers Use Personal Loans

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.

Types of Hardship Personal Loans 

There are two basic types of hardship personal loans:

Unsecured 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

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.

Pros and Cons of Hardship Personal Loans

As with any financial product, hardship personal loans have both benefits and downsides to consider.

Pros Explained

• Fast funding. You will generally receive your money within a few days of being approved for a hardship personal loan so that you can address a financial emergency quickly.
• Flexible use. You can use the funds from a hardship personal loan for almost anything, including paying your living expenses.

Cons Explained

• Qualifying can be difficult. You will generally need to prove that you are in serious financial difficulty in order to qualify for a hardship loan.
• Less flexible repayment schedules. This type of loan is designed to address a short-term emergency, and you'll likely have to repay the money you've borrowed within one to five years.
• Low maximum loan amounts. You won't be able to borrow a large amount of money with a hardship personal loan.
• Higher interest rates. If you have low credit scores, which can be common for those needing emergency or hardship loans, the interest rate will likely be quite high.

Alternatives to Hardship Personal Loans

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:

Retirement Plan Hardship Withdrawals

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. 

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.

Payday Alternative Loans

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) Loans

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:

• Employee assistance programs (EAPs). Some employers have programs that can provide financial help to cover medical expenses, repairs after a natural disaster, or other unexpected expenses.
• Charities. Some charities provide financial assistance to low-income people who are facing financial difficulties. Charities generally operate at a local level, so it's worth researching the options in your city or town.
• Government grants. While the federal government doesn't make grants to individuals (despite what some scam artists might tell you), many states do. These programs can assist with the cost of food, child care, housing, medicine, and utilities, although grants may not always be readily available due to grant cycles. Local county and city agencies and local nonprofits also offer grants to citizens needing assistance for things like rent, utilities, and child care. Grants, unlike loans, do not have to be paid back.
• Home equity loans and HELOCs. If you own a home and have built up equity in it, you can use that equity as collateral for either a home equity loan or a home equity line of credit (HELOC). Home equity loans and HELOCs can be good options if you face financial difficulties because they tend to have low interest rates and flexible repayment schedules. However, you risk losing your home to foreclosure if you cannot repay.
• Regular personal loans. If you're going to need financial assistance for a long period of time, it might make more sense to apply for a traditional personal loan that can offer a larger amount of money. Assuming you qualify, you may be able to obtain a loan of up to $50,000 and pay it back over five years.
  

How To Get a Hardship Personal Loan

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.

1. Get your credit score. That will help you to see which loans you might qualify for. You can obtain your credit score free of charge from some banks, credit card companies, and online sources.
2. Research loans you may be eligible for. Some hardship loan programs require you to prove that you are in genuine financial difficulty by their definition. Check out local banks and credit unions in your state or city because small lenders are more likely to offer hardship loans.
3. Compare offers. You can try to pre-qualify for several loans, which won't affect your credit score and will allow you to shop around for the best deal.
4. Submit your loan application. You can generally apply online, but you might have to submit documents to prove your income or situation.
5. Finalize your loan. If your application is approved, your lender will ask you to sign a loan agreement. Once you do, you should receive your money within a few days.

Frequently Asked Questions (FAQs)

The Bottom Line

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.