Hardship personal loans are personal loans (and other types of loan) that are available to borrowers who are facing financial difficulties. You may face financial hardship for a number of reasons.

Medical emergencies, a car accident, or losing a job are some examples of situations in which it might become difficult to meet your debt repayments or even cover the basic cost of living. Fortunately, many financial institutions have programs that offer help in these types of circumstance. This includes hardship personal loans, as well as other ways to access money in an emergency.

What Are Hardship Personal Loans?

The exact definition of a hardship loan varies by lender, but some lenders offer some version of a hardship loan. Hardship loans are similar to personal loans, but they tend to have low loan limits, low interest rates, and short repayment terms because they are designed to get you out of immediate financial trouble.

Smaller banks and credit unions are more likely to offer a hardship loan, and you’ll generally have to prove that you are facing genuine financial difficulties to access them.

If you’re approved, you can use a hardship loan for a variety of purposes, such as to meet unexpected payments like medical bills, to make other loan payments, or to pay for living expenses.

How Do Hardship Personal Loans Work?

Hardship loans work in a similar way to other kinds of personal loan. You’ll apply for the loan, usually online. If your application is approved, your lender will send you money in a lump sum, typically within a few days.

You’ll then repay this money, typically in equal monthly repayments over several months or several years. You’ll pay interest on the loan, and sometimes fees.

Hardship personal loans differ from other types of personal loan in several ways. You’ll have to prove you are in financial trouble to get this kind of loan, but your interest rate might be lower than you would get on a regular personal loan. The maximum amount you can borrow might also be lower, and you’ll have to pay back the loan fairly quickly.

How Do People Use Personal Loans?

venuscurves.commissioned a national survey of 962 U.S. adults between Aug. 14, 2023, to Sept. 15, 2023, who had taken out a personal loan to learn how they used their loan proceeds and how they might use future personal loans. Debt consolidation was the most common reason people borrowed money, followed by home improvement and other large expenditures.

Types of Hardship Personal Loan 

There are several types of programs that are designed to help you if you’re in financial difficulty. Some of these are personal loans, but you can also use your home equity or your retirement savings as a source of money. Here are some common types of hardship loan.

Unsecured Hardship Personal Loans

Unsecured personal loans are those that aren’t backed by any collateral. This means that your lender can’t repossess your assets if you fail to pay back the loan, but it also means that the lender is taking a larger risk in giving you the loan. This means that you will need a higher credit score, or have to pay a higher interest rate, in order to get this type of hardship loan.

Secured Hardship Personal Loans

Secured hardship personal loans, in contrast, are those that are backed by collateral. This makes them less risky for lenders, who can then offer this type of loan to customers with bad credit, or give customers with good credit a lower interest rate. If you can’t qualify for an unsecured personal loan, then a secured hardship loan can be a good option.

Retirement Plan Hardship Withdrawals

A hardship withdrawal is when you make an an emergency withdrawal from a tax-advantaged retirement plan. The Internal Revenue Service (IRS) allows these withdrawals in the event of “an immediate and heavy financial need.” This type of special distribution may be allowed without penalty from plans such as an individual retirement account (IRA) or a 401(k), provided that the withdrawal meets certain criteria regarding the need for the funds and their amount. 

A hardship withdrawal will still be subject to standard income tax and may be subject to early withdrawal penalties, such as a 10% penalty for withdrawals made before age 59½ on some accounts.

Payday Alternative Loans

Payday loans tend to have significantly high interest rates and are illegal in some states because they are regarded as predatory lending. However, some credit unions and online lenders offer payday alternative loans (sometimes known as PALs) that are generally less expensive.

Payday alternative loans can be used to cover an unexpected bill, and are available for borrowers with bad credit. However, be aware that this type of loan tends to have short repayment schedules and high interest rates, so your monthly repayments might be high.

Peer-to-Peer (P2P) Loans

Peer-to-peer (P2P) lending enables individuals to obtain loans directly from other individuals, cutting out the financial institution as the middleman. Websites that facilitate P2P lending have increased their adoption as an alternative method of financing.

If you are facing financial difficulties and finding it hard to qualify for the other types of hardship loan mentioned above, then P2P lending can be a good option. These loans tend to have less strict qualification requirements than standard personal loans, and can have low interest rates. However, maximum loan amounts can be low, so they may not cover the cost of your emergency.

Pros and Cons of Hardship Personal Loans

As with any financial product, hardship personal loans have benefits and downsides to consider.

Pros Explained

• Fast funding: You will generally receive your money within a few days of being approved for a hardship personal loan, so you can address a financial emergency quickly.
• Flexible use: You can use the funds from a hardship personal loan for almost anything, including paying for your living expenses.

Cons Explained

• Qualification can be difficult: You will generally need to prove that you are in genuine financial difficulty in order to qualify for a hardship loan.
• Less flexible repayment schedules: This type of loan is designed to address a short-term emergency, and you’ll likely have to pay back the money you’ve borrowed within one to five years. Depending on your interest rate, this could make your monthly repayments quite high.
• Low maximum loan amounts: You won’t be able to borrow a large amount of money on a hardship personal loan.
• Higher interest rates: If you have low credit scores, which can be common for those needing emergency or hardship loans, then the interest rate will likely be quite high.

Should You Use a Hardship Personal Loan?

If you are facing significant financial difficulties, explore all of your options before taking out a hardship personal loan. Though hardship personal loans may seem like the only option in an emergency, you may find another solution that works better for your financial situation.

Alternatives to Hardship Personal Loans

• Employee assistance programs (EAPs): Some employers have programs that can provide financial help to cover medical expenses, repairs after a natural disaster, or other unexpected expenses.
• Charities: Some charities provide financial assistance to low-income people who are facing financial difficulties. Charities generally operate at a local level, so it’s worth researching the options in your city or town.
• Government grants: Federal and state governments often run grant and loan programs for residents. These programs can assist with the cost of food, child care, housing, medicine, and utilities, although grants may not always be readily available due to grant cycles. Local county and city agencies and local nonprofits also offer grants to citizens needing assistance for things like rent, utilities, and child care for low-income single mothers and those experiencing homelessness.
• Home equity loans and HELOCs: If you own a home and have built up equity, you can use the value of the equity as collateral for a loan. This type of loan is called a home equity loan or a home equity line of credit (HELOC). Home equity loans or HELOCs can be a good option if you are facing financial difficulties, because they tend to have low interest rates and generous repayment schedules. However, you risk your home to foreclosure if you cannot repay.
• A personal loan: If you’re going to need financial assistance for a long period of time, it may make more sense to apply for a traditional personal loan that can offer a larger amount. You may be able to apply for a loan of up to $50,000, and pay it back over five years, which may be a more sustainable way to borrow than many short-term loans.
  

How to Get a Hardship Personal Loan

Getting a hardship personal loan is similar to applying for a traditional personal loan, with a few key differences. Here’s the process.

1. Get your credit score, which will help you to see which loans you qualify for.
2. Research hardship loans, and assess which loans you are eligible for. Some hardship loan programs will require you to prove that you are in genuine financial difficulty. It is worth looking at local banks and credit unions in your state or city, because small lenders are more likely to offer hardship loans.
3. Compare offers. You can pre-qualify for a few loans without affecting your credit score, so make sure you shop around for the best deal.
4. Submit a loan application. You can generally apply online, but you might have to submit documents to prove your income or situation.
5. Finalize your loan. If your application is approved, your lender will ask you to sign the loan agreement. Once you do, you should receive your money within a few days.

The Bottom Line

Hardship personal loans are a type of personal loan that is designed to help you overcome financial difficulties. This type of loan is generally offered by small banks and credit unions, and has lower interest rates, lower maximum loan amounts, and shorter repayment periods than standard personal loans. If you are facing financial hardship, it can make sense to take out a hardship personal loan, but it’s also worth looking into government grants, home equity loans or HELOCs, or IRA or 401(k) hardship withdrawals.