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Financial Hardship Loans: What Are They? How Can You Apply?

By Anna Davies · March 09, 2022 · 7 minute read

We’re here to help! First and foremost, SoFi Learn strives to be a beneficial resource to you as you navigate your financial journey. Read more We develop content that covers a variety of financial topics. Sometimes, that content may include information about products, features, or services that SoFi does not provide. We aim to break down complicated concepts, loop you in on the latest trends, and keep you up-to-date on the stuff you can use to help get your money right. Read less

Financial Hardship Loans: What Are They? How Can You Apply?

The past two years have certainly brought hardship to many people. The financial hardships many people have faced due to the pandemic may be difficult to overcome without assistance in some form.

Some people may have emergency savings to dip into or family or friends who can help them. But for people who can’t access either of those resources, help may come in the form of a hardship loan. Taking out a hardship loan could offer the cushion needed until a person’s financial prospects brighten.

What Is a Hardship Loan?

A hardship loan doesn’t have an official definition, but many personal finance institutions may offer their own version of hardship loans. At its core, a hardship loan is a loan that can help you get through unexpected financial challenges like unemployment, medical bills, or caregiving. Because the Covid-19 pandemic has encompassed all of these financial hardships, some people may be considering applying for a hardship loan.

What Can You Use a Hardship Loan For?

A hardship loan typically works like a personal loan. The borrower receives a lump sum of money to use as they need, with few limitations. This could include:

•   Rent or mortgage payments.

•   Catching up on past-due bills.

•   Everyday expenses like groceries and transportation.

•   Medical needs.

A hardship loan could overwhelm already strained finances, however. Debt in any form will have to be repaid eventually, even in the case of hardship personal loans.

Recommended: What Are Personal Loans Used For? And How to Apply

Hardship Borrowing Options

When you’re having financial difficulties, you may feel the need to make a quick decision about how to handle them. But assessing your options can help you find the best option for you based on your needs and financial circumstances. Here are some options you may want to consider when looking for financing during times of hardship.

Personal Loans

Personal loan workings are relatively simple: A lump sum of money is borrowed, typically at a fixed interest rate, and is repaid in installments over a set amount of time.

Unlike a credit card, which is revolving debt, a personal loan has a set end date and you’ll know exactly how much interest you’ll pay over the life of the loan.

Understanding types of debt — revolving vs. installment — is important when understanding what personal loans are and how they can be used. In addition to paying for current expenses, personal loans can also be beneficial in consolidating high-interest debt that you may have incurred, whether due to hardship or other reasons.

Normal personal loan interest rates are typically lower than credit card interest rates, making them an attractive alternative to credit cards.

Lenders look at your credit history, credit score, and other factors when determining what interest rate to offer an applicant.

Recommended: What Is a Personal Loan?

Credit Cards

Some people also may use credit cards to cover hardship expenses, a strategy that may be helpful in the moment, but could lead to larger bills over time.

A credit card with a 0% APR promotional period could be helpful in minimizing interest charges, but only if you can ensure the balance is paid in full before the introductory period ends. Unlike a personal loan, there is no set end date to the revolving debt of a credit card.

Peer-to-Peer Lending

Peer-to-peer (P2P) lending is becoming more common as people seek out nontraditional financing. P2P loans are generally managed through a lending platform that matches applicants with investors.

While it may offer more flexibility than a traditional loan, a P2P lending platform still looks at an applicant’s overall financial picture — including their credit score — during the approval process.

Like a traditional loan, a P2P’s loan terms and interest rates will vary depending on an applicant’s creditworthiness.

Generally, lenders in the P2P space will report accounts to credit bureaus just as traditional lenders do. So making regular, on-time payments can have a positive effect on your credit score. And, conversely, making late payments or failing to make payments at all can have a negative effect on your credit score.

Recommended: What Are P2P Transfers & How To Use Them

Home Equity

If you own your home, you may have considered borrowing against the value of your home. This may be in the form of a home equity loan, a home equity line of credit (HELOC), or refinancing your mortgage through a cash-out refinancing option.

With a home equity loan, you’ll pay back the loan (with interest) over an agreed-upon amount of time.

While a home equity loan is a lump sum, a HELOC is a revolving credit that can allow you to withdraw what you need. HELOCs often have variable interest rates that can make it challenging to plan for how to pay back the loan.

And in both the cases of a HELOC and a home equity loan, if you can’t pay back the loan or follow the agreed-upon terms, there is always the potential that you may lose your house.

Recommended: How Do Home Equity Lines of Credit Work?

401(k) Hardship Withdrawal

It also may be possible to withdraw funds from your retirement plan. Under normal circumstances, a penalty typically is incurred for early withdrawal. But that penalty may be waived due to certain types of financial hardship.

Exceptions to the penalty are limited, and most of the time funds will still be subject to taxation.

Making a hardship withdrawal from your retirement account means a missed opportunity for these funds to grow, potentially putting your retirement goals at a disadvantage or requiring you to come up with an alternative catch-up savings strategy for the future.

Recommended: 401(k) Hardship Withdrawals: What Are They and When Should You Use them?

Alternative Options

While personal loans can be used for a variety of financial needs, there may be other options to consider depending on your situation. For example, if you’re a single parent, you might consider seeking out loans for single moms or dads who have sole financial responsibility for their household. Here are some other options:

•   Employer-sponsored hardship programs. If you’re facing financial hardship, ask your employer if they have an employee assistance program (EAP). Financial assistance might be offered to help employees who have emergency medical bills, whose homes have extensive damage due to fire or flood, or who have experienced a death in the family. Employees will likely have to meet specific qualifications to receive EAP funds.

•   Borrowing from friends and relatives. Asking for an informal loan from a friend or family member is certainly an option for getting through financial hardship, although not one that should be considered lightly. Having clear communication about each party’s expectations and responsibilities can go a long way to keeping a relationship intact. Consider having a written loan agreement that outlines details about the loan such as the amount, interest rate (even if it’s nominal), and when repayment is expected.

•   Community-based resources. There may be specific grants within your community available for people with emergency financial needs. Organizations like 211.org help individuals find the assistance they need. Community-based social services organizations may also be able to make referrals to other organizations as needed.

•   Government programs. Federal and state governments list resources on their websites for individuals seeking financial hardship assistance. Depending on your circumstances, you may be eligible for certain government programs that could help reduce expenses for food, childcare, utilities, housing, or prescription medication, and others.

Covid-19 Loan Relief Options

As Covid-19 continues to cause long-term financial repercussions, some financial institutions offer relief programs for borrowers who are having trouble making their payments. These may include deferments or forbearance, among other things, and will still take your overall financial picture into account for qualification.

The CARES Act provides a temporary pause on federal student loan payments through May 1, 2022. If the act is not extended beyond that, the option to apply for hardship deferment or forbearance may be an option for some federal student loan borrowers.

SoFi offers an Unemployment Protection Program for qualified SoFi Personal Loan borrowers with loans in good standing. The program is offered in three-month increments up to a total of 12 months. During periods of forbearance or deferral, interest will still accrue and will be added to the principal of the loan. Other financial institutions may have similar programs — ask your lender for specifics.

The Takeaway

Researching all your options for financial relief is a wise move. You might find help from community, state, or federal sources; your employer, or a friend or family member. If you’re looking for financial help in the form of a hardship loan, a SoFi Personal Loan could be a good option for your unique financial situation.

With competitive, fixed rates and a variety of terms, personal loans from SoFi can be one option for financial help in times of hardship. Checking your rate won’t affect your credit score*, and it takes just one minute.

See if a personal loan from SoFi is right for you

Photo credit: iStock/staticnak1983

*Checking Your Rates: To check the rates and terms you may qualify for, SoFi conducts a soft credit pull that will not affect your credit score. However, if you choose a product and continue your application, we will request your full credit report from one or more consumer reporting agencies, which is considered a hard credit pull and may affect your credit.
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Tax Information: This article provides general background information only and is not intended to serve as legal or tax advice or as a substitute for legal counsel. You should consult your own attorney and/or tax advisor if you have a question requiring legal or tax advice.
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