Hardship Loans for Financial Setbacks

Financial emergencies are among the most stressful situations we experience (and we all experience them).

When you're looking for a hardship loan, it may be because you are temporarily unable to meet your basic needs. That's the kind of situation that requires fast, conscientious help at a cost that won't trap you in a cycle of debt. Here are our top picks for the hardship loans best suited for financial setbacks.

There are plenty of personal loans available, but here are the very best options when tough times hit.

• Best hardship loan for borrowers with poor credit scores: Upstart
• Best hardship loan for debt consolidation: LightStream

Why we chose these hardship loans

Upstart: Best for poor credit

With a credit score as low as 300, or with no credit score at all, you could land the loan you need to carry you over a financial hump. Using a nontraditional approach to lending, Upstart considers factors like education and employment to determine whether to approve a loan application. While Upstart's loan origination fees can take a bite out of the loan proceeds (0% to 12%), an Upstart loan provides options to people who may not have many choices.

LightStream: Best for debt consolidation

Debt consolidation should lower the cost of your existing debt (it's not a good idea to consolidate if you can't get a lower interest rate). Getting a lower interest rate could translate to a lower (and more affordable) monthly payment. Alternatively, if you get a lower rate but keep making a bigger payment, you could shorten the time it takes to pay off the debt. LightStream is an ideal solution for those looking to consolidate, with no origination, prepayment, or late fees.

What is a hardship loan?

A hardship loan is a loan to cover an unexpected financial shortfall, either because your expenses went up or your income went down. Hardship loans are not like other loans that are designed to meet an expected or planned need (like a car loan or a business expansion loan). A hardship loan is specifically for situations where you can't pay your bills.

You can learn more about some kinds of hardship loans by checking out these guides that we've prepared:

1. Emergency loan guide
2. Unemployment loan guide
3. Payday loan alternative guide

Then, if you decide that you need to apply for a loan, start with our list of best personal loan lenders. We checked out rates, qualification criteria, reputation, and other factors to put together a short list of resources that may be able to help you.

What types of hardship loans are available?

Hardship loans come in many varieties to meet different needs. Here are a few examples.

401(k) hardship withdrawal

Under certain circumstances, if you have an immediate and heavy financial need, you may be able to withdraw funds from your own 401(k). This is only an option if your employer offers it. If it does, and your financial need qualifies, you don't have to pay this money back. There are a few rules, such as that you can't take more than necessary, and you can't take the withdrawal if you have access to funds from another source.

The IRS limits how you can use a 401(k) hardship withdrawal:

• Certain primary residence purchase and repair expenses, or to prevent eviction or foreclosure
• Certain medical expenses
• Tuition, fees, and room and board (up to 12 months) for you or a qualified family member or beneficiary
• Burial and funeral expenses

You will have to pay income taxes on the amount you withdraw, and you may not be able to contribute to your 401(k) for six months after you take the withdrawal.

For some hardship withdrawals, you'll also pay a 10% penalty for pulling money out before age 59 1/2. You can get this penalty waived in some situations, including:

• You have medical debts (not premiums) that exceed 7.5% of your taxable income
• You are using the money to pay court ordered spousal or child support
• You are disabled
• You are a reservist being called to active duty

A 401(k) hardship withdrawal is not the same thing as borrowing from your 401(k). If your employer allows a 401(k) loan, you can avoid the 10% early withdrawal penalty by paying the loan back on time. A 401(k) loan is repaid with after-tax money, so you will lose the tax advantage on the amount you borrow.

Payday loan

A payday loan is a type of short-term cash advance. Most are set up to be repaid automatically from your bank account on your next payday. Payday loans are considered predatory. That means the loan terms are abusive and unfair to you, the borrower.

The typical payday loan offers quick money at very high prices (but you may not realize how expensive they are when you take the loan). It's not at all uncommon for a payday lender to charge 400%, 500%, or even 600% interest.

Most payday loan borrowers get trapped in a cycle of debt because it can be very hard to repay the loan plus all the fees by the due date. Even if you pay off your loan, doing so may leave you short on funds for the next month and needing another loan. According to Pew Charitable Trusts, the average borrower gets a $375 loan, has to renew the loan eight times, and pays $520 in fees. It can be hard to stop relying on payday loans once you start the cycle.

You should avoid payday loans because they are very costly but rarely your only option. Here are two alternatives that may be easy to access:

Credit union: Check with your local credit union (especially if you're already a member) to find out if they offer a payday alternative loan (PAL). (See the link to our PAL guide above.) This is a payday advance at a much lower cost than what you'll pay a storefront payday lender.

Cash advance app: You can also sign up for an app that offers a free cash advance or very low cost cash advance. Many cash advance apps can help you access between $10 and $500, to be repaid on your next payday. This type of cash advance is generally interest free, but some apps charge a monthly membership fee of $1 to $15. Also, if you need same-day delivery of your cash advance, you can incur a one-time fee in the same range.

The catch with these alternatives is that you'll need to set up your credit union account in advance, typically 30 to 60 days before you need the money.

Emergency home repair loan

It costs money to own a home. Besides the mortgage, insurance, taxes, and homeowners association (HOA) fees, you'll also face maintenance and repair costs over time. When your water heater decides to go kaput, you may need to come up with a couple thousand dollars to have it replaced. And you've got to act fast, because you're taking cold showers in the meantime.

Options for emergency home repairs include:

1. Home equity loan or home equity line of credit: You'll need to have equity to borrow against.
2. Credit card or credit card cash advance: You'll need to have sufficient available credit.
3. Personal loan: You'll need to qualify. We've written a guide to help you learn how to get a personal loan.

These are good options if you're keeping up with payments, but are at risk of falling behind.

Medical or veterinary care loan

Unexpected medical expenses are a leading cause of financial hardship. The first step you should take is to contact the healthcare provider to ask for a discount on your balance. They may also be willing to set up a payment plan that works for your budget.

If you know you will have an upcoming medical expense, you can consider a medical loan or medical credit card. Often, this type of medical expense loan is free if you are able to make every loan payment on time. Be careful, though. Medical financing usually comes with deferred interest. If you don't pay off the entire balance by the end of the loan term, you will have to pay interest on the entire balance, even the portion you've paid off.

You can finance pet medical care in a similar way. Some credit programs are available just for this purpose.

Other options include using a credit card or getting a personal loan.

Personal loans

A personal loan can be taken out for just about any reason, including a financial hardship. This is an installment loan. Your monthly payment and interest rate will be the same for the entire loan term.

How to get a personal loan

To get a personal loan, you'll need to meet whatever qualification criteria the lender requires, including the minimum credit score requirement. The interest rate usually depends on your credit score, the loan amount, and the loan term. Shorter repayment periods often come with a lower interest rate.

It doesn't matter if you go with an online lender or the bank in your neighborhood. But shop around to compare interest rates and fees.

If your credit score is not high enough to get the personal loan or to get an interest rate that makes the loan affordable, you might be able to improve your options by applying for a secured personal loan. To get a secured loan, you will need collateral. Collateral is something of value that the lender can keep if you fail to repay the loan. For example, if you own a certificate of deposit (CD) account (a special savings account that pays higher interest but restricts access to your money for a period of time), you may be able to borrow against it. Other property you can use as collateral for a personal loan include:

1. Your house
2. Your car or boat
3. Jewelry or other valuables
4. Life insurance

Deferment and forbearance

In some cases, you might be able to handle your financial emergency by working with a current lender rather than finding a new one.

How to get a payment pause

Mortgage payment forbearance is sometimes an option. That means you get to take a short payment break. With loan forbearance, interest still accrues. Also, the catch with most mortgage forbearance programs is that when you resume payments, you will be expected to make up all of your missed payments (in a payment plan, not a lump sum). It's not a good option for most people. You might be better off finding a hardship loan to help you cover the payment, rather than rack up a large bill that will increase your monthly financial obligations.

Call your mortgage servicer to find out the details of any relief program or forbearance plan it offers. Also, depending on your income and your loan details, you might even qualify for a loan modification that would permanently reduce your monthly payment.

Car loans and personal loans, as a rule, do not offer deferment or forbearance options.

Debt relief

If you are already behind on your payments and you feel like there is no hope of catching up, debt settlement might be an option. Debt settlement is getting your creditor to agree to accept less than the full amount you owe but consider it payment in full. The rest of the debt is forgiven. Creditors may be willing to do this if it's clear that you can't afford to fully repay your debt.

You can settle debts on your own. Your creditors will probably play hardball, so you'll need to get comfortable having uncomfortable conversations.

How does debt settlement work?

Stopping payments is not a requirement for debt negotiation. But if you're keeping up with your payments, your creditor may have a hard time believing that you can't keep doing so. Also, many settlement offers are for a lump sum payment, and you might have a hard time saving up money to offer as long as you're still making payments.

Debt collectors are aggressive. If negotiation sounds stressful or intimidating, you can work with a professional debt settlement company. It may be able to help you get a better result than you could get on your own, but it will charge a fee for each debt settled, which negates some of the savings. Some consumers let a debt relief company handle a debt or two, to see how it works, and then settle the rest of their debts on their own.

Know your rights

Forgiven debt is considered taxable income by the IRS, but you won't have to pay taxes if you're insolvent, meaning the total of what you owe is greater than the value of what you own.

Debt relief companies may not charge upfront fees. They can only charge you after they succeed in getting a portion of your debt forgiven (the fee is built into the process of building up your account and making settlement offers).

Debt relief is an alternative if you can't qualify for bankruptcy, or you want to protect assets that a bankruptcy would force you to lose, or you don't want the public record of a bankruptcy with your name on it. But debt settlement programs cannot stop collection efforts, including lawsuits, and are not guaranteed to succeed.

Other ways to help bridge a financial gap

Besides looking for emergency money, you can also ask for help. Sometimes, a quick phone call can temporarily erase a financial obligation. Reach out to all the companies you make payments to and ask what kind of financial assistance they can offer during your hardship. Your utility company might lower your rate temporarily. Your cellphone provider might allow you to pause your service for a month or two. Any relief you get from creditors can reduce the amount of money you need to make it through the hardship.