Hardship loan

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Financial distress is one of the most stressful situations we go through (and we all do).

If you are looking for a hardship loan, it may be because you are temporarily unable to meet your basic needs. This is the kind of situation that requires quick, conscientious help at a cost that doesn’t keep you caught in a debt cycle. This article can serve as a starting point when looking for a hardship loan option that is right for you.

What is a hardship loan?

A hardship loan is a loan that is used to cover unexpected financial difficulties, either because your expenses have increased or your income has decreased. Hardship loans are not like other loans that are designed to meet an expected or planned need (like a car loan or a business expansion loan). A hardship loan is intended for situations when you cannot pay your bills.

You can learn more about some types of hardship loans by looking at these guides we have prepared:

  1. Guide to the emergency loan
  2. Guide to Corona hardship loans
  3. Guide to unemployment benefits
  4. Alternative counselor for payday loans

Then, when you decide you need to apply for a loan, start with our list of the best personal lenders. We’ve reviewed pricing, qualification criteria, reputation, and other factors to compile a short list of resources that may be able to help you.

What types of hardship loans are there?

Hardship loans come in many variants to meet different needs. Here are a few examples.

401 (k) hardship withdrawal

In certain circumstances, when you have an immediate and strong financial need, you may be able to borrow from your own 401 (k). Your employer must offer this function. In addition, the money can only be used for:

  • Certain expenses related to the purchase and repair of your primary residence, or to prevent an eviction or foreclosure
  • Certain medical expenses
  • Tuition and fees (up to 12 months)
  • Funeral Expenses and Funeral Expenses

Payday loan

A payday loan is a type of short term cash advance. Most are set up to be automatically paid back from your bank account on the next payday. Payday loans are considered “predatory”. This means that the loan terms are abusive and unfair to you as a borrower.

The typical payday loan offers quick money at very high rates (but you may not know how expensive they are when you take out the loan).

Most payday loan borrowers get caught in a debt cycle as it can be very difficult to repay the loan plus any fees by the due date. Even if you pay off your loan, it could end up running out of money for the next month, requiring you to take out another loan. According to Pew Charitable Trusts, the average borrower ultimately pays $ 520 in fees to borrow $ 375 repeatedly. It can be hard to stop relying on payday loans once you start the cycle.

You should avoid payday loans as they are very expensive but seldom your only option. Here are two alternatives that may be easily available:

Credit union. Check with your local credit union (especially if you are already a member) to see if they offer a Payday Loan Alternative (PAL). (See the link to our PAL guide above.) This is a payday advance at a much lower price than what you would pay at an in-store payday lender.

Cash advance app. You can also sign up for an app that offers a free cash advance or a very affordable cash advance. Cash advance apps can help you access between $ 200 and $ 500 to be repaid the next payday. This type of cash advance is generally interest-free but can have a fee of anywhere from $ 1 to $ 14.

The catch with these alternatives is that you need to set up your account in advance, usually 30 to 60 days, before you need the funds.

Emergency repair credit

A home costs money. In addition to mortgages, insurance, taxes, and homeowners association (HOA) fees, maintenance and repair costs will also come up over time. If your water heater decides to break, you may have to raise a few thousand dollars to have it replaced. And you need to act quickly because you will be taking a cold shower in the meantime.

Options for emergency home repairs include:

  1. Home loan or home equity line of credit: You need equity to take out loans.
  2. Credit card or credit card advance: You must have sufficient funds available.
  3. Private loan: You have to qualify. We have written a guide to help you get a personal loan.

Medical or veterinary care loans

Unexpected medical expenses are a leading cause of financial distress. The first step you should take is to contact the healthcare provider to request a discount on your balance. You may also be ready to come up with a payment plan that fits your budget.

When you know that you will have an impending medical expense, you can consider a medical loan or medical credit card. Often times, this type of medical expense loan is free if you can make every loan payment on time. Be careful though. Medical funding usually comes with deferred interest. If you do not pay off the entire balance by the end of the credit period, you will have to pay interest on the entire balance, including the part that has been paid off.

Similarly, you can fund pet medical care. Some loan programs are only available for this purpose.

Other options include using a credit card or taking out a personal loan.

Personal Loans

A personal loan can be taken out for almost any reason, including financial difficulties. This is an installment loan. Your monthly payment and your interest rate will remain the same throughout the loan term.

In order to obtain a personal loan, you must meet all of the qualifying criteria required by the lender, including the minimum credit worthiness. The interest rate usually depends on your creditworthiness, the loan amount and the loan term. Shorter repayment periods often come with a lower interest rate.

It doesn’t matter whether you go to an online lender or the bank in your area. But shop around to get the best interest rate and lowest fees.

If your credit rating is not high enough to get the personal loan or 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 need collateral. For example, if you have a Certificate of Deposit (CD) account (a special type of savings account that pays higher interest but restricts access to your money for a period of time), you may be able to take out loans. Other things that you can use as collateral for a personal loan include:

  1. Your house
  2. Your car or boat
  3. Jewelry or other valuables
  4. insurance

Respect and forbearance

In some cases, you may be able to manage your financial plight by working with a current lender rather than finding a new one.

Deferring mortgage payments is sometimes an option, especially if the pandemic has hit your income. With Loan Forbearance, you benefit from deferred payments, but you still accrue interest. The catch with most mortgage forbearance programs is that when payments are resumed, you are expected to make up for any missed payments (in a payment schedule, not a lump sum). For most people, this is not a good option. Perhaps it is better to find a hardship loan that will help you cover the payment rather than running a large bill that increases your monthly financial obligations.

Call your mortgage administrator to find out the details of any assistance program or moratorium they offer. Depending on your income and credit details, you may even qualify for a loan modification that would permanently reduce your monthly payment.

Auto loans and personal loans typically do not offer forbearance or forbearance options.

Debt relief

When you’re financially stressed, debt relief options may jump out of your television. It is very easy to become attracted to programs that claim to help you pay off your debt and get quick relief.

To get straight to the point, it is very unlikely that you will successfully settle your debt for pennies on the dollar. And you’re torpedoing your credit score for years, if it’s not already low.

Typically, you no longer have to pay all of your bills and instead send a monthly payment to the debt relief company. Once your bills are overdue enough, the company will start making low bids to your creditors. This process takes years and may or may not be successful. If debts are paid for less than owed, expect your creditors to report the waived amount to the IRS as income, which increases your tax liability.

Other ways to fill a financial gap

In addition to finding emergency money, you can also ask for help. Sometimes a quick phone call can temporarily clear a financial commitment. Reach out to any companies you make payments to and ask what kind of financial assistance they can offer in your need. Your utility company could temporarily lower your tariff. Your wireless service provider may allow you to pause your service for a month or two. Any relief you get from creditors can reduce the amount of money you need to get through the hardship.


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