What Are Hardship Loans? When Should You Use One?

A financial hardship loan is a type of personal loan to help you through tough times.

Unlike a loan for a car or a home, a hardship loan provides quick relief for needs like medical bills, emergency home repairs, or basic living expenses.

Banks, credit unions, and other financial institutions might offer hardship loans with flexible terms to accommodate your circumstances and help you get back on your feet.

A financial hardship loan typically offers a lump sum that you pay off over several months or years with fixed, monthly payments. Some lenders charge origination fees, which may be deducted from your loan proceeds.¹

You’ll also have to pay interest on your loan – rates typically range from around 6% to 36%.²

You can apply for a hardship loan from a bank, credit union, or online lender. Some lenders let you prequalify first, meaning you can check your rates without impacting your credit. If the lender approves your official loan application, it can often issue your funds the same day or the next day.

Since hardship loans are designed for emergencies, the lender may ask for details about your financial situation or place guidelines around how you can use the money.

There are a few types of hardship loans:

• Unsecured personal loans: These loans don’t require collateral. Instead, a lender relies on your financial profile when making its approval decision. The stronger your credit, the better interest rate you’ll get on an unsecured personal loan. Having a stable income and low debt-to-income ratio (ideally 35% or less) will also help you qualify.³
• Secured personal loans: Secured hardship personal loans ask you to pledge collateral when you borrow, like a savings account, vehicle, or other asset. The risk is that a lender can seize your asset if you don’t pay back your loan. The benefit? Potentially higher loan amounts and lower interest rates. Secured loans may be considered hardship loans for bad credit, as they tend to have easier qualification requirements than unsecured loans.
• Employer hardship loans: If you’re experiencing financial issues, your employer might be able to help with an emergency loan or a paycheck advance.
• Nonprofit emergency loans: Some nonprofit organizations and charities provide low-interest or interest-free emergency loans to people in need.

Knowing how to get a hardship recovery loan will help you access funds when you need them most. Here’s a step-by-step guide to help you navigate the process.

Review your credit

Before you apply for a personal loan, check your credit score and review your credit report. Understanding your credit health will give you an idea of what loans you might qualify for and what terms you can expect.

There’s no universal minimum credit score for emergency hardship loans, but you have a better chance of approval with a credit score of 600 or higher.⁴ Borrowers with scores in the 700s will access more competitive rates and may avoid origination fees.

If your credit score is low, applying with a joint borrower might help you get approved or access a better interest rate.

Pre-qualify with multiple lenders

Pre-qualifying with multiple lenders allows you to compare terms, interest rates, and repayment options without impacting your credit score. This step helps you find the best hardship personal loan tailored to your financial situation.

Estimate your monthly payment

Determine how much you need to borrow and use a loan calculator to estimate your monthly payments to avoid over-borrowing and make sure you can manage the payments.

Prepare your documents

The requirements vary by lender, but you typically need:

• A photo ID
• Pay stubs
• Tax returns
• Bank account statements

Having your documentation ready streamlines the application process and helps you get the funds faster.

Submit the application and get funded

Once you’ve chosen your lender and prepared your documents, submit your application. If approved, review the loan agreement carefully before signing to make sure you understand the terms, interest rate, and payment due dates.

Lenders usually issue the funds fast – sometimes the same or next day you’re approved – so you can make moves right away.

While emergency hardship loans can provide relief during tough times, they’re not the only option. Here are some alternatives to hardship loans.

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Payday alternative loans (PALs)

Federal credit unions offer Payday Alternative Loans (PALs) as a more affordable option than traditional payday loans. Payday loans may advertise themselves as hardship loans with no credit check, but they can have sky-high interest rates and fees.

PALs typically come with lower interest rates and more favorable terms, helping you avoid the high costs and short repayment periods associated with payday loans. You can borrow anywhere from $200 to $1,000 with a PAL, and loan terms range from one to six months.⁵

Ask for bill extensions or payment plans

Many utility companies, landlords, healthcare providers, and service providers offer bill extensions or payment plans for customers experiencing financial hardship.

Contact your creditors to explain your situation and negotiate a manageable repayment schedule. This can provide immediate relief without taking on additional debt.

Retirement account hardship withdrawal

If you have a retirement plan at work, like a 401(k), 403(b), or 457(b) plan, you might be eligible for a hardship withdrawal.

If your plan allows hardship distributions, you may need to provide documentation proving you have an “immediate and heavy financial need,” like medical or funeral expenses, avoiding foreclosure, or repairs to your home after a natural disaster.

While hardship withdrawals allow you to access funds during an emergency, the money you withdraw is taxable income, and you may also have to pay a 10% penalty for early distributions.⁶

Withdrawing from your retirement savings can also affect your long-term financial security, so consider this option carefully.

Retirement plan loan

Another alternative to hardship loans is taking a loan from your 401(k). Unlike a hardship withdrawal, a 401(k) loan allows you to borrow against your retirement savings with the intent to repay it, usually within five years.

The loan amount is generally limited to 50% of your vested account balance or $50,000, whichever is less.⁷ You’ll need to repay the loan with interest, typically through automatic payroll deductions. The good news is that the interest you pay goes back into your 401(k) account, effectively paying yourself.

However, if you leave your job for any reason, you must repay the loan balance in full  – usually within a short period. Failing to repay the loan can result in it being treated as a distribution, which may trigger taxes and penalties if you’re under age 59½.⁸

Borrowing from your retirement savings also means losing out on potential investment growth during the loan period.

Credit card cash advance

A credit card cash advance is another emergency loan option. You can withdraw money from your credit card’s available balance at an ATM or by using a convenience check issued by your credit card company.

Credit card cash advances are simple and often readily available but come with high costs. They typically carry higher interest rates than regular credit card purchases, and interest starts accruing immediately, with no grace period.⁹

Your credit card company may also charge a cash advance fee, which can be a percentage of the amount withdrawn or a flat fee.

A hardship loan can provide much-needed financial relief, but taking on too much debt can create more problems. If borrowing is the right choice, compare rates and terms from multiple lenders to find the best offer.

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