Hardship loans: how to borrow during setbacks

Challenging times happen, but you can get money to help

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Life happens, and even the best budgeter cannot predict when a financial crisis will hit their wallet. Hardship loans, which are loans similar to personal loans, make it possible to get through situations like a medical emergency or job loss. These loans are still debt and can add to your financial burden. The following helps you understand the ins and outs of taking out a hardship loan and whether or not this is the right decision for you and your situation.

Key insights

Hardships are considered an event that makes it hard to afford immediate and heavy financial responsibilities.

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The main types of hardship loans include emergency loans, personal loans, 401(k) hardship withdrawals and HELOCs

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Before applying for a hardship loan, research free resources available in your community.

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What is a hardship loan?

Make sure to pay attention to repayment terms and interest rates before getting a hardship loan. Terms may be shorter and rates may be higher than with other loans.

Hardship loans are a type of loan for anyone who is experiencing a financial setback or crisis, whether from a sudden job loss, medical event or other situation that causes a lack of income. They can be used for a variety of purposes, including paying bills, buying food or even emergencies.

Although these loans are designed to help borrowers in tight money situations, you’re still taking on debt. Ask yourself if adding a new source of debt to your finances will give you the boost you need or will make budgeting harder. Don’t take on the debt if it will further complicate your financial situation.

» MORE: Best personal loans for fair credit

What can hardship loans be used for?

Hardship loans are a lot like personal loans and can be used to cover almost anything from buying food to significant expenses during a financial crisis. Examples of things that hardship loans can cover include:

  • Car repairs
  • Clothing expenses
  • Funeral expenses
  • Groceries and food
  • Home repairs
  • Medical bills
  • Mortgage or rent
  • Relocation expenses
  • Utilities

What situations qualify for a hardship loan?

Any situation that can cause you to have a sudden decrease in income that puts you on a tight budget and prevents you from meeting your basic living expenses may qualify you for a hardship loan. Some of these qualifying hardships include:

  • Sudden unemployment
  • Unexpected medical emergencies
  • Starting long-term medical treatments, like chemotherapy
  • Damage to your primary residence
  • Funeral costs for a spouse, child or dependent

Other situations, such as military deployment, incarceration, divorce or natural disaster, may also qualify you for a hardship loan. Business owners looking for a hardship loan will need to check with their local or state government to determine eligibility.

Lenders and financial institutions have hardship loans in place, but the qualification criteria might be stricter. For example, a 401(k) hardship withdrawal has limits on what is considered a hardship and how much money you can borrow. You might also have to call or inquire in person rather than apply online. And some lenders might have restrictions on what you can use your loan for. Make sure you read the fine print before applying for one of these loans to increase your odds of approval.

» MORE: Guide to getting a personal loan with a co-signer

Pros and cons of hardship loans

As with any loan, there are pros and cons. Taking out a hardship loan is still acquiring debt, and it's up to you to decide if the pros of that debt outweigh the cons. Take a look at the following to help you make a decision.


  • Lower credit score requirement
  • Many don’t require collateral
  • Help you avoid high-interest debt
  • Temporary financial relief in crisis


  • Shorter repayment terms
  • Higher interest rates
  • Taking on more debt might make your financial situation worse

Some borrowers are grateful for the assistance and able to make a hardship loan work in their favor, while others find themselves in a worse financial situation. Tokesha, a ConsumerAffairs reviewer from Wisconsin, said, “I am facing a financial hardship and I called (the lender) to explain my situation and both customer service reps had compassion for my situation and helped me with applying for a three-month hardship (loan) that could be extended at the (end of the] three months.”

...I called (the lender) to explain my situation and both customer service reps had compassion for my situation and helped me with applying for a three-month hardship (loan) that could be extended at the (end of the) three months. ”
— Tokesha, ConsumerAffairs reviewer from Wisconsin

How to apply for a hardship loan

Applying for a financial hardship loan is very similar to applying for a personal loan or auto loan.

  1. Check your credit score: Before you start, know where your credit score stands. Hardship loans might have a lower credit score requirement and be easier to get if you have bad credit, but expect a higher interest rate if you have a lower credit score.
  2. Get pre-qualified: Before you commit to a loan, you can see how much money you can receive and the APR by getting pre-qualified. This can help you decide if a hardship loan is your best option.
  3. Compare options: Once you know your rate, you can see if other lenders or types of hardship loans are more affordable.
  4. Apply: Completing the full application will require more information, such as your income and information about the qualifying hardship. During this step, the lender will do a hard credit inquiry, which will impact your credit score.
  5. Sign documents: After your application has been approved, you will be able to review your terms in the loan agreement. If you agree to the terms, you can sign the agreement — the last step before you receive your funds.

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Different types of hardship loans

If you’re considering a hardship loan, it’s important to know your options. There are several types of loans, and you should consider the pros and cons of each one before applying.

  • Emergency loans: These are fast loans that can cover a multitude of emergencies. Some lenders may even send your funds an hour after closing. However, the annual percentage rate (APR) on these can be high. Depending on your credit score, APRs can be up to 36%.
  • Personal loans: You can use a personal loan for many financial needs, and the fixed term helps you know how much to budget each month to repay your loan. Each lender sets its credit score requirements, so applicants with bad credit might be denied. However, if you’re approved, you can use the funds for almost any expense.
  • 401(k) hardship withdrawal loans: This type of withdrawal is limited to immediate and significant financial hardship, such as a medical bill. You cannot take out extra funds to cover the tax costs that come with this withdrawal. Unlike other 401(k) loans, hardship withdrawals are not repaid back into your account or rolled over to another individual retirement account (IRA).
  • Payday alternative loans (PAL): Offered by select credit unions, these loans are a safer alternative to payday loans. You can use a PAL for any expense, but $2,000 is the maximum amount you can receive. Instead of paying interest, borrowers pay a high application fee – typically $15 to $35 per $100 borrowed.
  • HELOC: If you have equity in your home, you can access it to cover your emergencies. Once your home equity line of credit (HELOC) is approved, you will have access to funds immediately and on an as-needed basis. However, unlike a personal loan, HELOCs come with a variable rate of interest, so your rates could go up or down over time.
  • Borrowing from family/friends/crowdfunding: Don’t be embarrassed to share your financial reality with close friends and family. They might have creative, helpful solutions or be willing to lend you funds to help you meet your needs. Alternatively, using a crowdfunding platform allows more people to chip in what they can. Fees to use crowdfunding range between 5% and 12%.

Hardship loans to avoid

Even when you feel desperate for financial assistance, it is best to stay away from predatory lenders. Although getting approval is relatively easy, predatory loans come with rates and terms that are very burdensome.

Unfortunately, not all hardship loan lenders have the best interests of borrowers in mind. “Some lenders can use very aggressive rates that can quickly increase the total amount of repayment,” said David Blaylock, a certified financial planner and head of financial planning at Origin, a financial planning platform.

He emphasizes paying attention to the total amount of interest on the loan and how it is calculated. “While repayment terms for hardship loans are typically shorter in nature, beware of any loan where the repayment time is weeks and not months,” he said.

Whenever possible, refrain from these types of loans:

  • Payday loans
  • Title loans
  • Pawnshop loans
  • Car title loans
  • No-credit-check loans

» MORE: What is predatory lending?

Alternatives to hardship loans

If you apply and are rejected for a hardship loan, or you’d rather not take on the payment associated with a loan, you might still be able to get assistance. There are many resources available through employers, counties and states, and local financial institutions. You can also try any of the following actions:

  • Call your creditors: As soon as possible, contact all of your creditors to explain your financial hardship. Do not wait until your bill is past due; the sooner you contact them, the more willing they might be to work with you. Additionally, utility companies might be able to refer you to local programs that can help cover your bills.
  • See which loans can be deferred: Some lenders have special deferment or forbearance options that will temporarily pause your payment responsibilities. Make sure you contact the lender to find out what steps you need to follow.
  • Research local assistance programs: Ask your local community center or religious institution what programs are available. Many cities have free grocery events or clothing drives that will help you get the resources you need.

IRS hardship program

If you have difficulty paying your taxes, you might qualify for the IRS hardship program called currently not collectible (CNC). This is not a hardship loan, but qualified individuals — those that the IRS deems unable to pay their tax debt and pay for basic needs — can be granted a temporary pause on their taxes owed. Tax debt will still accrue interest and late penalties, and you will still be required to pay once your financial situation improves.

» MORE: What is the IRS hardship program


Do I need good credit to get a hardship loan?

You don’t necessarily need good credit to get a hardship loan. Having good credit increases your odds of approval and gets you a lower rate, but some lenders have flexible credit score minimums for hardship loans.

What is considered a financial hardship?

Financial hardship is defined as not being able to pay your bills on time due to a lack of funds. Financial hardship can arise from situations including a medical emergency, job loss, car accident or death of a loved one.

Can I get a COVID-19 hardship loan?

You will need to inquire with your bank or lender if COVID-19-related hardship loans are still given. Many COVID financial relief programs stopped accepting applications at the beginning of 2022.

Can I get denied for a hardship loan?

While many lenders offer flexible terms for borrowers facing financial hardship, they still consider risk with each applicant. If you have a long history of unemployment or bad credit, you might be denied. If you are taking out a 401(k) hardship withdrawal, you can be denied if your hardship does not meet the IRS requirements for financial hardship.

Bottom line

A hardship loan can help you financially when the unexpected happens. Before taking out a loan, consider exploring free resources and assistance available in your area or through family members and friends. If you do need a financial hardship loan, choose a reputable lender offering manageable terms; avoid predatory lenders that have high APRs and require repayment in a short time frame.

Article sources
ConsumerAffairs writers primarily rely on government data, industry experts and original research from other reputable publications to inform their work. Specific sources for this article include:
  1. IRS, "Retirement Topics - Hardship Distributions." Accessed Nov. 14, 2022.
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