What is a Hardship Loan?

Life’s unexpected challenges often lead to surprise expenses. If you’re navigating a sudden shift in finances without the safety net of an emergency savings account, you might consider a hardship loan — a personal loan you can use to offset financial challenges. With a personal loan, you could get the money you need to cover essential costs and regain your financial footing.

What is a hardship loan?

A hardship loan is a personal loan that can be used to help you cover expenses during a financial setback, such as a job loss.

What is considered a hardship loan may vary from one lender to another.¹ Many banks, credit unions and lenders, like OneMain, offer personal loans you can use for expenses during financial hardships. Once you receive the money, you can spend it on what’s most pressing — whether that’s an urgent home repair or a medical bill.

To receive a personal loan for hardship, some lenders may require you to prove you are facing significant financial difficulties.² Many lenders, like OneMain, do not.

How do hardship loans work?

If you’re considering a personal loan to help with a financial hardship, you’ll apply with a lender, bank or credit union. If your application is approved, the lender will send you the funds. You typically must repay the loan in equal monthly installments over a set repayment term. In addition to the amount you borrowed, which is called the principal, you will also have to pay interest, which is the cost of borrowing money. Some personal loans may also have fees.

Personal loans may be secured, meaning they require collateral, or unsecured, which do not. Collateral is something of value that you possess, such as a car, that you use to back the loan. If you default on the loan, the lender may take possession of your collateral to offset the cost of what you owe. Collateral could boost your borrowing power, potentially helping you get a lower interest rate or more favorable repayment terms.

In some cases, lenders may ask you to prove that you’re experiencing financial hardship. Depending on the lender, some may require you to show documentation about your situation.³

When to consider applying for a hardship loan

Just like any other loan, you’ll need to repay the money you borrow, generally with interest and sometimes with added fees. Before committing to a hardship loan, it’s important to understand:

• When you’ll need to repay the loan
• How much it will cost to borrow the money after interest and any fees
• Whether you can afford the monthly payments
• Whether there are any fees for paying off your loan early

If you’re confident that you can afford to repay what you borrow, a personal loan due to hardship may be worth considering.

What to do before applying for a hardship loan

Here are some actions you can take before applying for a personal loan due to hardship.

Review your finances

Take some time to add up the expenses or debts you need to pay. Having a clear understanding of your financial needs makes it easier to identify areas where you may need additional support and how to receive it. It can also be helpful to create a budget and track your spending, so you can find additional places to save.

Reach out to creditors and service providers

If a serious illness or other hardship has left you short on money to pay your monthly debts and bills, consider reaching out to current creditors, lenders and service providers. You may find that many are willing to work with you to find options that help you get back on track, like temporary lower interest rates, loan deferments or reduced payments.⁴

Consider nonprofit and government assistance

If you’re unable to pay for basic needs, like food or shelter, local nonprofits and government assistance programs may help you access resources before you consider taking on new debt. Your state or local government may offer general assistance programs and other potential emergency aid.

Borrowing alternatives to hardship loans

A personal loan may be useful in many circumstances, including a time of hardship, but you may consider other borrowing options.

Borrowing from friends or family

A family loan could help you access the money you need with little to no interest and more flexible repayment terms. However, it’s best to borrow from friends and family with caution. Owing money to loved ones could cause unnecessary strain on your relationship, especially if you aren’t clear about the terms of the loan. Have an open conversation about your situation, and work together to develop a repayment plan that works for both parties.

Home equity loan or home equity line of credit

If you own your home, you may be able to borrow against its equity through a home equity loan or home equity line of credit (HELOC). Equity is the difference between your home’s current market value and how much you have left to pay on your mortgage.

A home equity loan, also known as a second mortgage, allows you to borrow a lump sum of money based on the amount of equity you have in your home and then repay it in fixed monthly payments. A HELOC is a line of credit that permits you to borrow up to a specified limit, but you only pay interest on the amount you actually borrow, like a credit card. While these borrowing options differ somewhat, both use your home as collateral. If you’re unable to repay what you borrow, the lender could take ownership of your home.⁵

401(k) hardship withdrawal or early withdrawal

During times of financial difficulty, you may be able to withdraw money from your 401(k) retirement plan, either through a hardship withdrawal or an early withdrawal. Each of these options has its own requirements and tax implications.⁶ For a hardship withdrawal, you’ll need to prove you have “immediate and heavy financial need.” You may only use the funds for certain purposes defined by the Internal Revenue Service (IRS).

Hardship withdrawals and early withdrawals may also impact your long-term retirement savings, so it’s important to consult with a financial expert before taking this step.

How to apply for a hardship loan

There are several steps involved in applying for a personal loan when facing hardship.

1. Check your eligibility

Every lender has their own way of evaluating applicants. For example, lenders may consider your credit score, income and ability to repay the loan. OneMain offers personal loans that you can use to deal with a hardship. They work with a wide range of customer credit scores and take your whole financial picture into account to help you find a loan that’s right for you.

One way to check your eligibility is to prequalify for a loan. Prequalification lets you consider your options and budget before you commit to a loan. It’s typically a quick and easy process, but timing does depend on the lender. Prequalifying has no impact on your credit score.

2. Apply

Most lenders, including OneMain, allow you to fill out and submit a personal loan application online. However, you may also be able to apply for a loan by phone or in person, if you prefer. When you apply for any type of loan, the lender will perform a hard inquiry on your credit report, which may have a small, temporary impact on your credit score.

3. Gather your documents

After applying, you’ll usually need to provide some important documents, including:

• Proof of identity (driver's license, state-issued ID card, passport or available third-party verification service)
• Proof of residence (such as a driver’s license with current address, utility bill or signed lease)
• Proof of income (such as pay stubs or tax returns)

Some lenders may also ask for documents that show why you need a hardship loan.⁷ You may need to provide additional items based on your personal situation.

4. Wait for review and approval

The lender will review your application to decide if you’re approved for the loan. Depending on the situation, the lender may contact you for more information to finalize your loan.

Review the loan offer

If you’re approved, you’ll receive a loan offer that explains the amount, interest rate, any fees, and the repayment terms. Before accepting any loan, make sure you understand all the details. Don’t be afraid to ask questions if you are unsure about anything.

Receive your funds

Once you accept the loan offer and sign the loan agreement documents, it’s time to receive your funds. Some lenders, like OneMain, may send your funds the same day your loan is approved.^† Others may take more time, depending on whether you choose to receive the money via direct deposit or a paper check.

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Get the money — and relief — you need

Finding financial balance may seem impossible in a time of hardship, but a setback doesn’t have to define your future. By exploring your resources and making borrowing decisions that work for your needs, you can regain control and build more stability to help you face whatever surprises life holds.

Sources:

1,2,3,7 https://www.investopedia.com/what-are-hardship-personal-loans-7963276
4 https://www.nerdwallet.com/article/credit-cards/what-is-a-credit-card-hardship-program
5 https://consumer.ftc.gov/articles/home-equity-loans-and-home-equity-lines-credit
6 https://www.irs.gov/retirement-plans/hardships-early-withdrawals-and-loans