Hardship Loan: What is it?
Common types of financial distress loans
Although there are different forms of hardship loans, any of them can be used to cover unavoidable expenses. However, keep in mind that not every option is right for your situation. Consider the pros and cons of each so you can choose the one that works best for you.
Unsecured personal loans from hardship cases
An unsecured hardship loan is a Type of Personal Loan that requires no collateral. Instead, lenders determine how much you can borrow by evaluating your creditworthiness and financial situation. If you have bad credit, you may have trouble qualifying for an unsecured personal loan as most lenders have strict requirements.
Using an unsecured personal loan during an emergency can have several benefits. One is that you don’t have to use anything of value as collateral. You also don’t have to worry about the lender getting back collateral if you default on the loan.
Like any type of financing, unsecured loans come with some downsides. Because you don’t need collateral to secure the loan, your lender takes on a higher risk. And the more risk the lender has, the higher your interest rate and annual percentage rate (APR). This option could therefore be more expensive than the alternatives.
Secured Hardship Personal Loans
Unlike an unsecured personal loan a secured loan requires some form of collateral. As a result, most lenders have less stringent eligibility policies, which likely make it easier for borrowers with low credit scores to obtain approval.
The main advantages of a secured personal loan are lower interest rates, longer terms and larger loan amounts. These perks are possible because, as mentioned earlier, pawn loans help mitigate the risk of the lender.
On the other hand, using collateral means that the lender can claim your property as their property and sell it to make up their losses if you are unable to make the payments. Simply put, a secured hardship loan can put you at greater risk than an unsecured loan.
You may have heard of home equity loans being used to fund a home improvement project, but did you know you can also use them in an emergency? If you own your home and have a significant amount of equity, you can turn some of it into cash when you find yourself in a desperate situation.
Home equity loans offer fixed interest rates that are typically lower than personal loans. Home equity loans also have longer loan terms, which means paying off the loan could be easier. The more time you have to pay back what you borrow, the lower the monthly payments will be.
Unfortunately, this type of loan can mean taking on significant debt. A second payment can be difficult to manage if you’re already struggling to pay your mortgage. Home equity loans also use your home as collateral. So if you default, you could lose your home to foreclosure.
401(k) Withdrawal from Hardship Cases
Depending on your situation, you may be able to take out a short-term loan from your 401(k) retirement plan. Most employers offer this option for specific purposes, such as:
- Repair of a main residence
- Avoid foreclosure or eviction
- Settlement of qualified medical bills
- Financing a college degree
- payment of the funeral expenses
Before choosing this option, discuss your situation with your plan administrator to ensure you meet the eligibility requirements.
Borrowing money from your retirement account could help you avoid taking out high-interest loans or accumulating credit card debt. Additionally, you don’t have to meet any lender’s requirements or have your credit checked to access the funds.
You may be prompted to do so pay a penalty or tax when you withdraw from your 401(k). This option could also hurt your future retirement plans if you don’t pay back what you’ve withdrawn relatively quickly.
Alternative Payday Loans
Payday loans are notorious for their predatory lending practices and can create a vicious cycle of debt. Thankfully, many credit unions and online lenders offer alternative payday loans (sometimes referred to as PALs). These loans have short terms, typically one year or less, and low credit limits.
You can use a PAL to quickly cover a last-minute bill without applying for a loan from a payday lender. Also, this type of loan may be cheaper than an unsecured personal loan.
The short period of time in which you have to pay back the amount borrowed means that your monthly loan payments could be higher than expected. The APRs on PALs can also be extremely high, especially when compared to home equity loans or secured personal loans.
peer to peer lending
In the past decade, peer-to-peer lending platforms have grown in popularity due to their accessibility. A peer-to-peer (P2P) loan is similar to borrowing money from a family member or friend, except that the people lending you money can be anyone using the platform.
P2P lending typically uses low interest rates to ensure affordability. Even borrowers with little or no credit rating can use this option, as the requirements are more relaxed than with a classic personal loan. Finally, some P2P lenders may require investors to meet certain criteria before lending money to borrowers, furthering user safety.
Just because you have access to a P2P lending platform doesn’t mean you’ll be able to secure enough funds to cover the costs of an emergency. And, like with a traditional installment loan, if you default on a peer-to-peer loan, you risk damaging your credit score. It’s also worth noting that some platforms can charge hefty service fees for every loan you take out.