What Are Hardship Loans and How Do They Work?

By Chika

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Last Updated: March 31, 2022

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The financial hardship brought about by the pandemic may be hard to overcome without some form of financial assistance for most people.

For those who don't have emergency savings to fall back on or family and friends who can bail them out when in need, getting their finances back on track would definitely be an uphill task. 

If you are in this category, getting a hardship loan may be the only viable way of wriggling yourself out of your financial mess. This article sheds a spotlight on hardship loans, how they work and if you should apply for one in the event of a difficult financial situation. 

 

What Are Hardship Loans?

Although there is no formal definition for a hardship loan, several personal financial institutions may provide their own version of the loan.

A hardship loan, at its most basic level, is a loan that can assist you in overcoming unanticipated financial obstacles such as unemployment, medical costs, or caring.

Some folks may be contemplating asking for a hardship loan since the Covid-19 epidemic has engulfed all of these financial troubles.

 

What Can Hardship Loans Be Used For?

A hardship loan typically works like a personal loan. The borrower receives a lump sum of money to use as they need, with few limitations. This could include:

  • Rent or mortgage payments.
  • Catching up on past-due bills.
  • Everyday expenses like groceries and transportation.
  • Medical needs.

A hardship loan could overwhelm already strained finances. However, debt in any form will have to be repaid eventually, even in the case of hardship personal loans. This makes taking hardship loans to alleviate financial troubles a risky venture

 

Should You Take a Hardship Loan?

While "hardship loans" may address a short-term necessity, they can be exceedingly expensive, making it much more difficult to improve your overall financial status.

Albeit, before you take out a loan, look into alternative choices including loan modification, forbearance, payment plans, or financial aid. If you do decide to apply for a loan, search around and be sure to include in the costs – both to your budget and to your long-term financial well-being.

 

Borrowing Options to Hardship Loans

If you are experiencing financial difficulties, you may feel the need to take the easiest option. However, the easiest way is not always the best way, as you could be paying a higher price in the future.

There are a variety of options you can take based on your needs and financial circumstances. Here are some alternatives you may want to consider in place of a hardship loan.

1. Personal Loans

These are usually straightforward: a lump sum is borrowed at a fixed interest rate, with payments made in installments over a predefined period.

Personal loans can be useful for consolidating high-interest debt that you may have accrued due to hardship or other causes, in addition to paying for current costs.

Interest rates on personal loans are typically lower than credit card interest rates, making them an attractive alternative to hardship loans.

2. Credit Cards

Credit cards can be used as a stop-gap measure during times of financial difficulty. A credit card with a 0% APR promotional period could be helpful in minimizing interest charges, but only if you can ensure the balance is paid in full before the introductory period ends. 

However, a caveat must be added here. If credit cards are not used efficiently you could be digging yourself into a financial hole. Unlike a personal loan, there is no set end date to the revolving debt of a credit card.

As such, there is a tendency to keep piling up debt because of their revolving nature. As such, before you take a credit card, make sure you have a repayment plan.

3. Peer-to-Peer Lending

Peer-to-peer (P2P) lending is getting increasingly popular as consumers look for alternative finance. In most cases, P2P loans are administered through a lending platform that connects applicants with investors.

While a P2P lending platform may provide more flexibility than a traditional loan, it nevertheless considers an applicant's whole financial picture — including their credit score — throughout the approval process.

The conditions and interest rates of a P2P loan, like those of a regular loan, will vary based on the applicant's creditworthiness.

In general, P2P lenders will report accounts to credit bureaus in the same way that traditional lenders do. Making frequent, on-time payments might thereby improve your credit score.

Making late payments or failing to make any payments at all, on the other hand, might have a negative impact on your credit score.

4. Home Equity

You can also consider obtaining borrowing against the value of your home if you own one. This can be done through a home equity loan, a home equity line of credit (HELOC), or refinancing your mortgage through a cash-out refinancing option.

With a home equity loan is a lump sum with a fixed interest rate that is paid over an agreed-upon amount of time. HELOC on the other hand, is a revolving credit (like a credit card loan) that allows you to withdraw what you need.

HELOCs often have variable interest rates that can make it challenging to plan for how to pay back the loan.

We can't overstate the fact that you need to have a solid plan for repayment before you obtain the loan. This is because, unlike a credit card, your house is being used as collateral. Failure to repay the loan may lead to you losing your house.

5. 401(k) Hardship Withdrawal

You may also be able to withdraw cash from your retirement plan. Under normal conditions, an early withdrawal penalty is imposed. However, owing to certain sorts of financial difficulty, the penalty may be waived.

There are few exceptions to the penalty, and most money will still be liable to taxes.

Making a hardship withdrawal from your retirement account implies you are foregoing the opportunity for these assets to grow, possibly putting your retirement plans at risk or necessitating the development of an alternate catch-up savings strategy for the future.

 

Lesser-known alternatives for hardship loans

Employer-sponsored hardship programs

If you are experiencing financial difficulties, inquire with your workplace about an employee assistance program (EAP).

Employees who have emergency medical costs, whose houses have substantial damage due to fire or water, or who have experienced a death in the family may be eligible for financial assistance.

Employees will very certainly have to fulfill certain criteria in order to obtain EAP monies.

Community-based resources

There may be particular grants available in your community for those in dire financial situations. Organizations such as 211.org assist folks in locating the aid they require.

Community-based social service groups may also be able to refer people to other organizations if necessary.

Government programs

Individuals seeking financial hardship aid can find resources on the websites of the federal and state governments.

Depending on your circumstances, you may be qualified for government programs that can help you save money on things like food, daycare, utilities, housing, and prescription medicine, among other things.

 

Key takeaway

The last two years have been a roller coaster ride, with more downs than ups for some people. If you're in a financial bind, a hardship loan might come in helpful. However, bear in mind that taking on debt is always a commitment, so make sure you'll be able to repay the loan on time.

Investigate credit unions, banks, and internet lenders for hardship loans, taking into consideration interest rates, payback periods, fees, and other factors. Even if your position appears to be desperate, take the time necessary to discover the best loan option for you.

Photo by Geoffrey Crofte on Unsplash

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