When life throws curveballs, like a medical emergency, losing a job, or an emergency home repair, financial support may be a lifeline. One of the possible loans that can help you in such situations is a hardship personal loan. Let us dig in on what these loans are and how they work and look at some alternatives that might be better if you need a personal loan for bad credit.

What Are Hardship Personal Loans?

A hardship personal loan is specifically designed for people going through financial difficulties. These loans are the same as other personal loans, but there are a few differences. They generally offer lower loan limits, shorter repayment terms, and lower interest rates. They are meant to help you cover emergency expenses, like medical bills or making overdue loan payments, and get you back on your feet.

These hardship loans are usually provided by small banks and credit unions. You need to show that you are facing difficulties with funds, typically by explaining the situation, providing income statements, or submitting other relevant documents.

How Do Hardship Personal Loans Work?

When you apply for a hardship loan, it is applied for much like any other personal loan; you fill out an application and produce the necessary documents, which, if approved, are disbursed to you in a lump sum.

Then, you will have to pay back the loan in equal monthly installments over a fixed period, usually ranging from one to five years. The terms of repayment are normally fixed, and you will also pay interest on the loan, which can depend on factors such as your credit score and the kind of loan.

Important points to note:

• You need to prove your financial problems to qualify.
• The amount of loan tends to be smaller compared to the normal loans.
• Repayment terms are usually shorter.
• Another key advantage of hardship loans is that they tend to carry lower interest rates than most loans. However, it is important to note that if your credit score is poor, you are still likely to pay more interest compared to people with better credit scores.

Types of Hardship Personal Loans

There are two types of hardship personal loans: secured and unsecured.

Unsecured Hardship Loans: 

This loan does not have any security; thus, you will not have to give up your car or house. However, you may have to provide a higher credit score, as the lender’s risk level is a bit higher.

Secured Hardship Personal Loans: 

These loans are secured. They utilize your house or vehicle as security. For the lender, the loan carries a lower risk. Therefore, it is simpler to be eligible for them, particularly if your credit is greater. But if you do not pay back the loan, the lender can seize your collateral, so you will be in danger.

Alternatives to Hardship Personal Loans

While hardship personal loans are quite helpful, there are other alternatives. Here are some you can consider:

Retirement Plan Hardship Withdrawals:

If you have a retirement account, like a 401(k) or IRA, you can take a hardship withdrawal. The IRS lets you take withdrawals from such accounts if you have a legitimate financial need, including a doctor’s bill or repairs for your home, but remember that you pay income tax on the withdrawn amount, and you can expect to be penalized if you are under age 59½.

Payday Alternative Loans (PALs):

Payday loans have very high interest rates and are usually too expensive to pay back. PALs, however, are issued by credit unions and are good source for emergency cash often at a lower interest and payback rate. They could be used to pay emergency expenses for small amounts, which can range from $200 to $1,000, and should be paid in one to six months.

Peer-to-Peer (P2P) Loans:

P2P lending matches borrowers with lenders through online applications. Such loans might be less stringent to qualify for than other personal loans and offered at lower interest rates, but sometimes the amounts that can be borrowed are low, and it takes a while before finding a willing lender.

Home Equity Loans or HELOCs:

If you own a home and have equity in it, consider a home equity loan or a Home Equity Line of Credit (HELOC). These loans offer more flexible terms and reduced interest rates. But they endanger your house. Be careful when using these.

Government Assistance Programs:

Government grants, local aid programs, and nonprofits can provide financial assistance for rent, medical bills, utilities, and other living expenses. Most do not have to be paid back, and they can be the light at the end of a very dark tunnel.

Applying for a Hardship Personal Loan

If you believe that a hardship personal loan is the way you will get through your bad day, here is how to apply:

• Check Your Credit Score: Knowing your credit score helps you know the type of loan you qualify for and whether you may need to secure the loan with collateral.
• Research Lenders: Look for small banks or credit unions that offer hardship loans. Check if they have specific requirements for applicants facing financial difficulty.
• Compare Loan Offers: Try pre-qualifying with multiple lenders to compare loan amounts, interest rates, and repayment terms.
• Submit Your Application: Fill out the online application and attach the required paperwork, including proof of income and financial hardship.
• Receive Your Funds: If approved, sign the loan agreement and receive the funds, often within a few days.

Conclusion

Hardship personal loans can be a helpful tool to manage unexpected expenses during difficult times. While these loans can be fast and flexible, it is important to carefully consider your financial situation and explore other options, such as retirement plan withdrawals or government assistance, before deciding. Always shop around for the best terms to ensure that you are making the best decision for your future.