What would you do if you lost your job or needed roof repairs? If your emergency fund wasn't big enough to cover the costs, you might consider borrowing money to get you through. That's the point of hardship loans, which can be used for urgent expenses, whether planned or unplanned. However, these loans can be difficult to get if you have bad or no credit.
Fortunately, hardship loans do exist for even those with a poor credit score.
Learn more about these loans and some possible alternatives, so that you can get your finances back on track as quickly as possible. Get the scoop on how these loans work, where to get them, and what to know before applying — even if you have poor credit.
What is a hardship loan?
A hardship loan1 is a personal loan that can be used to pay for unexpected or immediate costs related to a hardship, such as a medical emergency, job loss, car or home repairs, or another personal crisis. It's designed to help cover the costs of the difficult situation or fill in the gap for rent or living expenses until the borrower can get back on their feet.
Other hardship loan characteristics include:
- Loan amounts vary from person to person, depending on the lender and the borrower's qualifications.
- Repayment terms span one to a few years and are much shorter than a mortgage.
- Loans may be unsecured, meaning the borrower doesn't have to put any of their own possessions up for collateral.
Because hardship loans cater to those with emergency financial needs, they can be paid out in a few days or even the same day in some cases.
Lenders don't usually advertise a loan as a hardship loan. They will have one or more personal loan options to choose from, with the understanding that you can use it for a number of purposes, including for hardships.
Hardship loans for bad credit
It can be difficult to qualify for any type of loan when you have bad credit. But what exactly is bad credit?
According to Experian, the credit reporting agency behind the FICO credit score, a bad credit score is below 580. At this score, you won't get approved for many of the common loans offered by banks and other lenders.
However, this isn't the end of the story. Lenders exist for those without great credit, and they offer hardship loans, too. Some possibilities include online banks and credit union loans.
When seeking out loans for poor credit, you'll still have to go through the same process as anyone else and maybe even have to provide some additional information. Here are some tips for a smooth approval process:
1. Research more than one bank
Compare banks that deal with bad credit consumers. They are often the same banks that offer credit cards to those with poor credit. Look into their credit limits, what they require for an application, interest rates, and terms. Many will allow you to check rates and limits before putting in an official application, which will only result in a soft credit check2 (one that won't negatively affect your credit score).
2. Come prepared with documentation
Most loans for poor credit rely on factors other than just your credit score because they know it will be low. Expect to provide pay stubs, balances on your current loans, mortgage paperwork, or even tax returns3. Self-employed applicants won't have pay stubs and can sometimes use their 1040 tax forms to show what they make each year. Have addresses, phone numbers, and your social security number ready to go before you apply, as well.
3. Consider smaller loans
Finally, if you find that you don't qualify for a larger loan, you might see how a small one can still meet your needs. Since a smaller loan4 will have more affordable monthly payments and lower interest charged overall, it may even be a better financial move in the long run. No matter how much of a loan you qualify for, have a plan for how you'll spend it smartly to deal with your hardship and pay the loan back on time.
4. Only apply for one loan
Even if you shop around and preview your rates with several lenders, don't put in a formal application for more than one lender5. Banks and credit unions do a hard credit check6 (one that slightly drops your credit score) to do the final verification. If you do this more than once, you'll end up with an even lower score than necessary, something someone with bad credit wants to avoid.
5. Use the loan as a stepping stone
Finally, hardships can be frustrating, especially when they affect your finances. If you use this bad credit hardship loan wisely, you can get credit for on-time payments and possibly even raise your score. Be sure to budget for your new loan payment, adding it to your monthly expenses and making sure you have enough income each month to cover it. In time, you may find yourself in a better position than when you started.
Alternatives if you can't qualify for a hardship loan
If you're unsure whether you qualify for a hardship loan (or have concerns about being able to pay it back), you may consider other ways to meet your financial obligations, such as:
- Asking lenders for a payment deferral or payment restructuring
- Applying for government assistance programs for housing, heating, food, childcare, or healthcare
- Researching any employer-based emergency aid grants
- Taking on a part-time gig, such as freelancing, delivery driving, or one of these other work-from-home jobs, to earn some extra income
If you need cash right away, you can also try these alternatives:
Borrowing from friends and family
Not everyone knows someone who would lend them money in a pinch. If you do, you may ask if they would be able to help you out. Asking money from a loved one can be complicated, so make sure you set clear boundaries for repayment amounts and due dates.
Pros:
- May qualify even with bad credit; no credit check required
- Flexible terms, including lower (or no interest) and manageable repayments
- Quick or immediate access to cash
- Won't count against your credit utilization
Cons:
- Could put your relationship at risk if you can't repay
- Smaller loan amounts than a bank or credit union
- Fewer protections for you and the lender if not guaranteed with a contract
- No credit-building benefits for on-time payments
Hardship withdrawal from a retirement account
If you have money in a 401(k) or other retirement plan, you could access this cash to help you through a difficult time. These withdrawals come with limitations on how they can be used, and you can only withdraw the amount needed to cover your immediate expenses. Check with your plan administrator or financial advisor about how taking an early withdrawal from retirement can affect your overall financial situation. Once taken out, these funds can't be put back into your plan.
Pros:
- Provides almost immediate cash when other options aren't available
- No credit check needed, since approval is based on hardship criteria
- Not a loan and doesn't need to be repaid
Cons:
- Must pay income taxes on the amount withdrawn
- May be subject to state and federal tax penalties if you're not of retirement age and don't qualify for an exception
- No earnings on this money once withdrawn; could reduce future account growth
- Not available for all retirement plans
Payday loans
One other option is a payday loan, which should be used only as a last resort for funding. These loans are made available to almost anyone who can show proof of income, and you can get cash immediately in most cases. Payday loans aren't available in all states, as they can be considered "predatory" due to the short loan terms and high interest rates. It's easy for consumers to get into a bad borrowing cycle where they aren't in a better financial position in the few short weeks before the loan comes due, so they have to borrow again (paying even more interest).
Given the high cost of these loans, they generally aren't recommended except in extreme cases. You may be better off with one of the above payday loan alternatives.
Pros:
- Quick cash, typically with minimal paperwork
- No credit check with approval based on income in most circumstances
- Accessible to anyone with employment in most cases
Cons:
- Extremely high interest rates and fees – totaling 300%-600% annual percentage rates (APR) in some cases
- Short repayment period, due in full by your next payday
- No credit building for on-time payments
- Not legal in all states
Getting financial help with bad credit
A leaky roof. A broken arm. An unexpected layoff.
When bad things happen, it can seem like there's no way out. If you have poor credit, it can become even more challenging to get help when you need it most.
Fortunately, low-credit-score loans do exist, and several lenders specialize in extending credit to even those who have made mistakes in the past. If you choose the right lender for you and borrow just enough to cover your immediate needs, you may even use the loan to build your credit over the life of the loan, turning your hardship into a financial opportunity.
*Sources for this article can be found below.