Hardship Loans: How to Borrow Money During a Financial Setback – NerdWallet

A financial hardship can add stress to an already-difficult situation, like when your vehicle breaks down, someone in your household loses their job or a family member requires expensive medical care.

A hardship loan can be any money you borrow during such a difficult time. This can include a loan from a friend or family member, a personal loan or equity financing.

Though there are safe borrowing options for tough times, taking on debt may add to your burden. That makes it important to compare all your options before you borrow.

Here are some hardship loan options, plus alternatives to borrowing.

Hardship loan options

Friend and family loans

Borrowing money from a friend or family member may be the cheapest option, especially if the person who lends to you doesn’t charge interest. A friend or relative also won’t consider your credit score like a bank or online lender would. Asking someone you’re close with to lend you money may bruise your ego, but it can also be the fastest and simplest option.

To set expectations, draw up a contract detailing the loan amount and terms, including when and how often payments will be made and how much they’ll be.

Amount: You and the person you borrow from determine the loan amount, but note that there may be tax implications if the loan exceeds $15,000.

What it’s for: This option can be helpful if you’ve recently lost your job or main source of income, which may disqualify you from most traditional loan options. You can use this money for a car repair or to get back on track after a difficult time. You and the lender can decide whether to restrict how the funds are used.

Requirements: Typically no qualification requirements.

Costs: Your friend or family member can decide whether to charge interest. Beyond hard costs, a friend or family loan could cost you the relationship if something goes wrong, so tread carefully.

Payday alternative loans

Payday alternative loans, or PALs, are small-dollar loans available to members of some credit unions. If you have a low credit score and are a member of a credit union that offers PALs, it’s one of your cheapest borrowing options. You typically have between one and 12 months to repay this loan.

Amount: $200 to $2,000.

What it’s for: These are small, short-term loans that can help you pay for small emergencies or unexpected expenses.

Requirements: You may have to be a credit union member for at least a month to qualify, but some only require that you become a member. Your income and ability to repay the loan are key factors in determining whether you qualify.

Costs: PALs can have annual percentage rates of up to 28%. Some credit unions require a one-time membership fee.

Personal loans

Unsecured personal loans are offered by banks, credit unions and online lenders to borrowers with all types of credit. Some lenders offer secured personal loans, which require collateral like a vehicle or savings account and can help you qualify for a better rate.

Some personal loans are tailored to consumers with bad credit (629 or lower FICO), so a low credit score won’t necessarily prevent you from qualifying for a personal loan. If you’re borrowing for an emergency, a personal loan can be funded within a couple of days.

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Amount: $1,000 to $100,000.

What it’s for: If your credit score has recently taken a hit but remains above 550, a personal loan can help you with urgent home repairs or medical emergencies.

Requirements: Each lender has different requirements. Some banks and credit unions require you to be an existing customer to get a loan. Borrowers with good or excellent credit (690 or higher FICO) typically get the lowest rates and many lenders like to see a debt-to-income ratio below 40%. Adding a co-signer with strong income and credit may improve your chances of qualifying.

Costs: APRs on personal loans range from about 6% to 36%. Some lenders charge an origination fee, which is calculated in the APR, and may reduce the loan amount you receive.

401(k) hardship withdrawals

If you’ve been contributing to a 401(k), you may qualify for a hardship withdrawal. Check your plan to determine if you qualify and what the specific conditions are.

Amount: This type of withdrawal lets you access money you — and maybe your employer — have contributed to the fund, but probably not any gains the money has made while it has been invested.

What it’s for: Generally, expenses such as medical bills, college tuition, money to avoid eviction, funeral expenses and some home repairs qualify for hardship withdrawal.

Requirements: Your plan’s administrator usually decides whether you qualify, and you may have to explain why you can’t get the money elsewhere.

Costs: If you’ve lost your job and are under age 55, you could face tax penalties for withdrawing money from your 401(k). You may still have to pay a 10% tax penalty if you withdraw the money before age 59 1/2. This option also leaves you with less in savings for retirement.

Home equity loans and lines of credit

With a home equity loan or line of credit, you borrow against the equity your home has gained. A home equity loan comes in a lump sum, while a HELOC is an open credit line you use as needed.

Tapping your equity to cover a hardship can be a risky option because you use your home as collateral. That means if you don’t repay the borrowed funds, you could lose the house. Also, if your home’s value drops, you could owe more than what it’s worth.

Amount: Up to about 85% of your home’s value.

What it’s for: Urgent home repairs are a good use of home equity financing, as long as you’re comfortable using your home as collateral.

Requirements: You usually need more than 20% equity in your home, a debt-to-income ratio of less than 40% and a 620 or higher credit score. A lender will also require employment and income verification.

Other hardship assistance

For help meeting basic needs: Seek assistance from local nonprofits, charities and religious organizations. They can help you get food, clothing and access to transportation for job interviews.

For help with rent or utilities: Contact your utility company, landlord or mortgage issuer for help deferring a payment. If you need long-term help, consider seeking other housing or contacting a housing counselor.

To pay medical bills: Learn about ways to cover medical costs, including payment plans.

To clear unsecured debt: Debt relief can help if your debt has become overwhelming. Learn about the different types of debt relief and their consequences.

To pause student loan payments: If you meet certain criteria, you may be eligible for student loan deferment or forbearance.

Hardship financing to avoid

No-credit-check loans: A lender may offer a no-credit-check loan for borrowers with low or no credit scores, but beware of this option. These lenders may not review your ability to repay the loan and will charge triple-digit interest rates to account for the risk of you not paying.

Payday loans: Payday lenders may attract consumers in hardship because they have few qualification requirements, and some lend to you regardless of your employment status. They often require repayment of the entire loan amount in two weeks, which can lead to a cycle of debt if you’re unable to make the payment and have to borrow again.

How personal loans work in hardship

If you have a personal loan and need hardship assistance, contact your lender. Most lenders offer hardship assistance, often working out a plan on a case-by-case basis.

If your hardship plan involves pausing loan payments, ask your lender how that will be reported to the major credit bureaus. Payments reported as late or missed will hurt your credit.

How lenders are responding to COVID-19

Initially, personal loan lenders — including banks, online lenders and credit unions — responded to the pandemic by making hardship programs consistent and public. Many offered a month or more of deferred or reduced payments.

Toward the end of 2020, most lenders had taken the COVID-19 assistance information off their websites and returned to normal case-by-case hardship offerings.

If you’re experiencing a financial hardship related to the pandemic, call your lender and ask what assistance is available.