1. LOANS

Hardship Loans for Bad Credit

Hardship Loans for Bad Credit
BY Erik J. Martin
Jun 19, 2024
Key Takeaways:
  • A hardship loan could be a personal loan, a home equity loan, a peer-to-peer loan, or some other kind of loan.
  • Hardship loans come in different forms, including personal loans, home equity financing, and peer-to-peer lending.
  • It can be challenging to qualify for a hardship loan with poor credit.
  • A debt relief option such as a debt management plan or debt settlement is worth exploring.

Life can be full of surprises that cost a lot, even with the best of plans. Things like sudden medical bills, losing a job, or natural disasters can be tough and make us feel out of control. When hard times come, one option is to borrow money to help you weather the storm. But borrowing can be difficult and expensive when you have credit score damage. It can be hard to figure out what your best option is.

In this article, we'll explain the different types of loans you might consider when you're going through a tough time. These are sometimes called hardship loans. Our goal is to help you make the smartest decision that's best for you. You're not alone, and we're here to help you find a way to get through it all.

What is a hardship loan?

A hardship loan is a loan to help you get through a money crisis or financial emergency. Hardships take many forms, including job loss, divorce, costly medical problems, death, or a serious setback like theft or fire. Fortunately, a hardship loan can be used to pay for nearly anything needed, such as rent, clothing, food, and overdue bills.

Common sources of hardship loans include banks, credit unions, and online lenders. The lender may call this type of financing something other than a hardship loan. But regardless of the name given, each of these loan products is intended to provide financial help when you need it most.

Hardship personal loans

Hardship loans are typically personal loans. You borrow a lump sum of cash, usually with a fixed interest rate, that you'll pay back over an agreed period in equal monthly installments. The advantage of a personal loan over credit cards for a hardship or emergency is that the former has a firm payoff date and usually charges a lower fixed-interest rate. In contrast, rates for credit card debt tend to be much higher. Also, credit card rates are variable, which means they can change.

There are two types of hardship personal loans. The first is an unsecured personal loan. The lender will decide how much you can borrow by evaluating your financial status and credit score. Another term for an unsecured personal loan is a signature loan, meaning your signature is required. You don’t have to own anything valuable that you can borrow against.

The second type is a secured personal loan. You must pledge collateral for this financing. That means you have to offer something valuable to the lender that they can take if you fail to repay the loan. Depending on what the lender allows, you could borrow against a savings or investment account, jewelry, collectibles, a life insurance policy, or something else. The collateral reduces the risk for the lender. In turn, you may be offered a lower interest rate, larger borrowing limit, and longer-term rate compared to an unsecured personal loan. But you could lose your collateral if you default on the loan.

Hardship loan variations and alternatives

You can also pursue other loan choices during money troubles. These include the following.

Home equity loan

Home equity loans are a way to borrow against your home equity (the difference between your home’s value and the amount you owe on your mortgage). Home equity loans are installment loans. This means you borrow a lump sum and pay it back over time in equal monthly payments. These payments usually have a fixed interest rate, which means that the rate won't change over the life of the loan.

It's important to remember that a home equity loan is a type of mortgage, meaning your property is used as collateral. If you don't repay the loan as agreed, you could lose the home.

Home equity line of credit (HELOC)

A HELOC is a line of credit against your home equity. Like a home equity loan, it’s a mortgage.

Instead of getting a lump sum of money upfront, a HELOC lets you borrow, repay, and borrow more, as needed, up to your credit limit. You’ll pay interest on the amount you borrow. HELOCs typically have variable interest rates, which means that the interest rate can change over time.

With a HELOC, there’s a draw period and a repayment period. During the draw period, you can borrow, repay, and borrow more. When that time ends, usually after a few years, you’ll enter the repayment period and can’t borrow more. 

Peer-to-peer loan

Peer-to-peer (P2P) lending is a system where people pool their money to make loans. Sometimes you can qualify for a P2P loan even if traditional lenders turn you down. P2P lending platforms use automated systems and algorithms to evaluate borrowers' creditworthiness, set loan terms, and determine interest rates. P2P loans are typically unsecured, meaning they don't require collateral.

401(k) hardship withdrawal

You may be allowed to withdraw money from your 401(k) plan if you have an immediate and heavy need. Some situations automatically qualify, such as medical expenses for you, your spouse, or your dependent, or costs you incur to prevent eviction or foreclosure. Check the IRS’s website for more info.

Most retirement accounts are designed to let you start taking money out penalty-free at age 59½. If you take out money before that age, including for a hardship, you could be hit with a 10% penalty and must pay income tax on the amount you withdraw. A hardship withdrawal is not a loan. You can’t pay it back, so you’ll lose the benefit of growth over time on that money. 

Can you get a hardship loan with bad credit?

Yes, there are hardship loans for people with bad credit, and what you qualify for will depend on many factors. Those include your credit score, whether you can offer collateral, how much money you need, where you apply, whether you have stable income, and so on.

Some lenders consider good credit to be a credit score of at least 670. You have fair credit if your credit score is around 600. A poor credit score is below 580. Lenders consider more than just your credit score when evaluating your loan application. Your ability to repay the loan is crucial, and lenders will analyze your income and your other debts. 

It’s possible to get a hardship loan with a lower credit score. If you have cash assets you can borrow against, like a Certificate of Deposit or an investment account, talk to your own bank or credit union. If not, talk to online personal loan lenders. Home equity and HELOC lenders may be able to help you if you have sufficient equity and qualify otherwise.

The best way to find out what your options are is to start asking questions. Take care not to apply during your research phase. If a lender does a hard pull on your credit, that could cause your score to drop temporarily, and you might not have any points to spare right now. 

Options to avoid

Payday loan

A payday loan is a short-term, high-cost loan that's meant to be repaid on your next payday. Payday loans are often for smaller amounts, usually $500 or less. When you take out a payday loan, you may have to authorize the lender to automatically take the money out of your bank account when the loan is due. If you can’t pay it back, you would have to renew the loan and pay more loan fees. Payday borrowers renew their loans an average of eight times before finally clearing the debt. 

Payday loans are very expensive, with an APR of 400-1,000% (a high credit card interest rate is around 36%, and personal loan rates typically range from about 8% to 36%). 

If you’re having a financial crisis, a payday loan is more likely to make it worse than better. Payday loans are considered predatory, meaning the terms are abusive to the borrower.

Title loan

Title loans are short-term loans that use your vehicle as the collateral. In some states, title loan APRs are capped at 36%. In that case, a title loan is comparable to a credit card. In other states, the APR is often around 400%. Rates that high are considered predatory (abusive). 

The problem with title loans is that if your financial issues don’t get resolved, you could lose your car, which could make it harder to get to work. To get a title loan, most lenders require that you own your vehicle outright, and they’ll hold onto the title until the debt is satisfied. You’ll also need to provide a duplicate set of keys and sign something authorizing the lender to take possession of your car if you default on the loan. The lender may install a GPS tracking device on your vehicle. 

Debt relief if you can’t get a loan

Getting relief from your current debts could free up cash and give your budget some relief. That could make it easier to pay for necessary expenses and stay caught up on your other bills. Here are a few ways to get debt relief.

Debt settlement

Debt settlement is negotiating with creditors to accept less than the full amount you owe. They consider it payment in full and forgive the rest. They might be willing to do this if you’re experiencing a hardship. It costs a lot of money to sue people for debts, and creditors know that negotiating may produce a better financial outcome for them in the end. 

You can settle debts yourself or hire a professional debt settlement company to help you. If you work with professionals, you’ll pay a fee for each debt they settle.

Deferment or forbearance

Some creditors offer hardship programs in the form of temporary payment relief. The pause could last anywhere from a month to a couple of years. Some lenders continue to charge interest, and some don’t. Deferred payments aren't forgiven. They are added to your loan balance. Some lenders will require that you get caught up by a certain deadline (that could be a hardship in itself). Contact your creditors, explain your situation, and find out the details about any hardship programs they offer. 

Debt management plan

A debt management plan is a repayment plan administered by a nonprofit credit counseling agency. It’s designed to fully repay your unsecured debts in 3-5 years. You’ll make monthly payments to an account the credit counseling agency has access to. They distribute the money to your creditors. Debts that can be managed through a debt management plan (DMP) usually include unsecured debts such as credit card debt or medical bills.

When you enroll in a DMP, creditors may agree to reduce or remove certain fees and lower your interest rate, to help make the debt more affordable. Even so, if you have a lot of credit card debt, the monthly payments can be unaffordably high. 

DMPs are a good option to consider if you can afford to fully repay your debts but you need help getting a handle on your finances.

Choosing a path forward

Financial hardships happen to everyone, and the best path forward depends on the unique circumstances of your situation. Take a breath and take your time as you research your options. It might help to make a spreadsheet so that you can make clear comparisons. Consider the near and long-term future, including the possibility of earning more and getting out of debt sooner than expected. Talk to a financial professional or two. And remember that you’re not alone: Many Americans face hardship but find possible ways to get back on their feet financially.