If you’re experiencing serious, unexpected financial difficulties, hardship loans offer a way to get cash to keep you afloat. There are several types of hardship loans on the market, and they’re typically only available if you meet certain criteria for a short-term financial crisis.
We’ll dig into when a hardship loan may be a good option and what to watch out for when getting one.
What is a hardship loan?
A hardship loan offers fast cash to cover unplanned bills or expenses when you can’t wait for traditional financing. There are several types of hardship loans, each with its own approval process, costs, and restrictions:
- Bank or credit union. These are typically offered to existing customers who meet specific criteria.
- Online hardship lenders. Online lenders offer faster approvals than banks, but generally come with higher rates and fees.
- Employer 401(k) hardship withdrawals and loans. This loan allows you to borrow against retirement savings or payroll advances.
- Government or nonprofit assistance programs. Grants or zero-interest loans for specific needs such as rent relief, medical bills, or utilities.
When a hardship loan may be a good option
Not every rough patch requires a loan, and not every situation qualifies for hardship loans. Here are four times when using a hardship loan may actually be smart:
1. You’re facing eviction or utility shutoffs
If your rent is past due or your power is about to be cut off, a hardship loan could help you stay afloat. These types of emergencies can escalate fast. Borrowing just enough to cover the gap may be the difference between falling deeper into a crisis and staying secure while you figure out your finances.
2. You’ve had a sudden loss of income
Maybe you were laid off unexpectedly or your hours were cut. If you’re sure your income will bounce back, such as being between jobs but have something lined up, a hardship loan can bridge the gap until your next payday. Just be sure to only borrow what you need and have a realistic plan to repay it.
3. You’re dealing with a medical emergency
Medical bills stack up quickly, especially if you don’t have insurance or it doesn’t cover everything. A hardship loan can help cover urgent care, surgery or prescriptions when health is the priority. It’s not ideal to borrow for medical debt, but in certain cases, a loan may be necessary, especially if you have a plan to repay it and expect your medical costs to be temporary.
4. Essential home or car repairs required for safety or employment
In some cases, a broken appliance or car isn’t just an inconvenience — it’s a threat to your well-being or your ability to earn a living. For example, a furnace that dies out during freezing temperatures, a leaking roof that causes mold, or a car that won’t start when you have no other way to get to work.
In these scenarios, waiting until you have money saved up isn’t always realistic. A hardship loan can help cover urgent repairs to keep you going while you work out your finances.
When to skip out on a hardship loan
You’ll want to skip the hardship loan if you’re using it as a short-term fix for a longer-term problem or for non-essential expenses that don’t address an urgent need. For example, to consolidate debt without a plan to change financial habits, a vacation, a wedding, or a home upgrade.
If you’re consistently falling short each month with no plan to recover financially, a loan may only deepen the hole. In these cases, it’s better to seek financial counseling or explore other support options before taking on more debt.
What to watch out for
Here are a few red flags and pitfalls to keep on your radar to avoid costly mistakes before taking out a loan:
- Hidden fees. Watch out for origination fees, prepayment penalties, or surprise charges.
- Short repayment terms. If the loan is due in 30 days, that might not give you enough breathing room.
- Scam lenders. Only borrow from reputable companies. If it sounds too good to be true, it probably is.
- Impact on your credit. Missing payments or defaulting could hurt your credit score even more.
- Borrowing more than you need. It’s tempting to take extra, but stick to the essentials to avoid spiraling further into debt.
- No clear repayment plan. If you don’t know how you’ll repay the loan, you could be setting yourself up for trouble.
The bottom line
Hardship loans are useful in tough times, but they’re not a fit for every financial issue. Before you borrow, make sure the need is real, you understand the terms, and you have a clear plan to repay it. Take time to explore your options, read the fine print, and choose what’s best for both your current situation and long-term financial health.
