Financial emergencies are among the most stressful situations we experience (and we all experience them).
When 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 and conscientious help at a cost that won’t trap you in a cycle of debt. This article can serve as a starting point when looking for a difficult loan option that might be right for you.
What is an emergency loan?
A difficult loan is a loan intended to cover an unforeseen shortfall, either because your expenses have increased or because your income has decreased. Hardship loans are not like other loans designed to meet an expected or planned need (such as a car loan or a business expansion loan). A tough loan is for situations where you can’t pay your bills.
You can learn more about certain types of hardship loans by looking at these guides we’ve prepared:
- Emergency loan guide
- Coronavirus Difficulty Loan Guide
- Unemployment loan guide
- A Guide to Payday Loan Alternatives
Then, if you decide you need to apply for a loan, start with our list of the best personal loan lenders. We’ve checked pricing, qualifying criteria, reputation, and other factors to come up with a short list of resources that can help you.
What types of hardship loans are available?
Hardship loans come in many varieties to meet different needs. Here are some examples.
401 (k) hardship removal
In certain circumstances, if you have an immediate and significant financial need, you may be able to borrow on your own 401 (k). Your employer must offer this functionality. In addition, the money can only be used for:
- Certain primary residence purchase and repair costs, or to prevent eviction or foreclosure
- Certain medical expenses
- Tuition and fees (up to 12 months)
- Burial and funeral costs
A payday loan is a type of short term cash advance. Most are set up to be reimbursed automatically from your bank account on your next payday. Payday loans are considered “predatory”. This means that the terms of the loan are abusive and unfair to you, the borrower.
The typical payday loan offers fast cash at very high prices (but you might not realize how expensive they are when you take out the loan).
Most payday loan borrowers are trapped in a cycle of debt because it can be very difficult to pay off the loan plus all fees on the due date. Even if you pay off your loan, you may run out of funds for the next month, so you will need to take out another loan. According to Pew Charitable Trusts, the average borrower ultimately pays $ 520 in fees to repeatedly borrow $ 375. It can be difficult to stop relying on payday loans once you have started the cycle.
You should avoid payday loans as they are very expensive but rarely your only option. Here are two alternatives that may be easy to access:
Checkout. Check with your local credit union (especially if you are already a member) to see if they have an alternative to payday loan (PAL). (See link to our PAL guide above.) This is a payday advance at a cost much less than what you’ll pay a payday lender.
Cash advance application. You can also sign up for an app that offers free cash advance or very low cost cash advance. Cash advance apps can help you get anywhere between $ 200 and $ 500, to be paid off on your next payday. This type of cash advance is usually interest free, but can cost anywhere from $ 1 to $ 14.
The problem with these alternatives is that you will have to set up your account in advance, usually 30 to 60 days before you need the money.
Emergency home repair loan
It costs money to own a house. Along with the mortgage, insurance, tax, and homeowners association (HOA) fees, you’ll also have to deal with maintenance and repair costs over time. When your water heater decides to switch to kaput, you might have to shell out a few thousand dollars to replace it. And you have to act fast, because you take cold showers while waiting.
Options for emergency home repairs include:
- Home equity loan or home equity line of credit: You will need equity to borrow.
- Credit card or cash advance by credit card: You will need to have enough credit available.
- Personal loan: You will need to qualify. We’ve put together a guide to help you learn how to get a personal loan.
Loan of medical or veterinary care
One of the main causes of financial hardship is unexpected medical expenses. The first step you need to take is to contact the health care provider to request a discount on your balance. They may also be willing to set up a payment plan to suit your budget.
If you know you will have medical expenses ahead, you may want to consider a medical loan or a medical credit card. Often times, this type of medical expense loan is free if you are able to make each loan payment on time. Be careful, however. Medical funding usually comes with deferred interest. If you do not pay off the entire balance at the end of the loan term, you will have to pay interest on the entire balance, even on the part that you have repaid.
You can fund medical care for animals in the same way. Some credit programs are only available for this purpose.
Other options include using a credit card or obtaining a personal loan.
A personal loan can be taken out for any reason, including financial hardship. This is an installment loan. Your monthly payment and interest rate will be the same throughout the life of the loan.
To get a personal loan, you will need to meet the qualifying criteria required by the lender, including their minimum credit score. The interest rate usually depends on your credit score, the loan amount, and the length of the loan. Shorter repayment periods often come with a lower interest rate.
It doesn’t matter if you go with an online lender or your neighborhood bank. But shop around for the best interest rate and the lowest fees.
If your credit score is not high enough to get the personal loan or to 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 will need collateral. For example, if you have a certificate of deposit (CD) account (a special savings account that pays higher interest but restricts access to your money for a period of time), you may be able to borrow from that. -this. Other items that you can use as collateral for a personal loan include:
- Your house
- Your car or boat
- Jewelry or other valuables
Postponement and tolerance
In some cases, you may be able to manage your financial emergency by working with an existing lender rather than finding a new one.
Mortgage forbearance is sometimes an option, especially if your income has been affected by the pandemic. With forbearance, you benefit from deferred payments, but the interest continues to accrue. The problem with most mortgage forgiveness programs is that when you resume payments, you will have to make up for all of your missed payments (in a payment plan, not a lump sum). This is not a good option for most people. You might be better off finding a tough loan to help cover the payment, rather than racking up a big bill that will increase your monthly financial obligations.
Call your mortgage agent for details of any relief or forbearance plans they offer. Plus, depending on your income and loan details, you might even be eligible for a loan modification that would definitely lower your monthly payment.
Typically, auto loans and personal loans do not offer deferral or forbearance options.
When you’re financially stressed, debt relief options can jump right at you from your TV. It is very easy to be attracted to programs that claim to help you settle your debts and get relief fast.
To get right to the point, it’s highly unlikely that you’ll be able to pay off your debts for pennies on the dollar. And you’ll torpedo your credit score for years if it’s not already low.
Typically, you will need to stop paying all of your bills and send a monthly payment to the debt relief company instead. Once your bills are sufficiently overdue, the company begins to make low offers to your creditors. This process takes years and may or may not be successful. If debts are paid for less than what is owed, expect your creditors to report the remitted amount to the IRS as income, increasing your tax liability.
Other ways to help close a financial gap
In addition to looking for emergency money, you can also ask for help. Sometimes a quick phone call can temporarily wipe out a financial obligation. Contact all the companies you make payments to and ask them what kind of financial assistance they can offer during your difficulties. Your utility company may temporarily reduce your rate. Your mobile operator may allow you to suspend your service for a month or two. Any relief you get from creditors can reduce the amount of money you need to get through hardship.