Financial hardship can cause stress in already difficult situations, such as when your vehicle breaks down, someone in your family loses their job, or a loved one requires costly medical care.
Any money you borrow in such difficult times is considered a hardship loan. This could be a loan from a family member or friend or a personal loan.
Although there are safe borrowing choices for difficult times, you should not take on more debt. It is important to evaluate all options before borrowing.
Options for hardship loans
Family and friend loans
Borrowing money from friends or family members may be the most cost-effective option, especially if they don’t charge interest. A relative or friend won’t consider your credit score as a bank or online lender might. Although it may hurt your ego to ask someone you know to lend you money, it is often the easiest and fastest option.
A contract should be drawn up detailing the loan amount, terms and when payments will be made.
The amount: Both you and the borrower decide the loan amount. However, it is important to note that the loan amount may have tax consequences if it exceeds $15,000.
It’s used for: If you have recently lost your main source of income or job, this option may be beneficial. This money can be used to repair your car or get you back on track following a hard time. You and the lender can agree to limit the use of the funds.
Requirements
Costs: It is up to your friend or family member to decide whether you want to charge interest. A friend loan or family loan can harm your relationship.
Alternative loans for payday lenders
PALs are short-term loans that are available to members of credit unions. If you have low credit scores and are a member of a credit union that provides PALs, this is one of the most affordable borrowing options. This loan can be repaid in between 1 and 12 months.
The amount: $200-$2,000
It’s used for: These short-term loans can be used to pay for small emergency expenses or unexpected costs.
Requirements: Some credit unions require you to be a member for at least one month to qualify. Others only need you to become a member. It is important to consider your income and ability to repay the loan in determining your eligibility.
Annual percentage rates for PALs can reach up to 28%. Some credit unions charge a one-time membership fee.
Personal
Online lenders, credit unions, and banks offer unsecured personal loans to all credit types. You may be eligible for a lower rate by obtaining secured personal loans from lenders who require collateral such as a vehicle or savings accounts.
Personal loans can be approved for poor credit scores (629 and lower FICO). A personal loan is possible to borrow to meet an immediate need.
The amount: $1,000 to $100,000
It’s useful: A personal loan is available to help with medical or home emergencies and urgent repairs.
Requirements: Every lender has its conditions. To get a loan, some banks and credit unions will require an existing customer. Borrowers with excellent or good credit (690 FICO or higher) usually get the lowest rates. Many lenders prefer to see a ratio below 40 percent. Your chances of getting approved may be improved by adding a cosigner with strong credit and income.
Personal loans have an APR of between 6% and 36%. Lenders may charge an origination cost included in the APR and can reduce the amount of the loan you receive.
Avoid hardship financing
No credit check loans: Lenders may offer no-credit-check loans to borrowers with poor or no credit scores. However, be careful. These lenders might not assess your ability to repay the loan and charge triple-digit interest rates to cover the risk you don’t pay.
Payday loans: These lenders are attractive to consumers in financial hardship. They have very few qualifications and can lend you money regardless of your employment status. You may have to repay the entire amount within two weeks. This can cause a cycle of debt if you cannot pay the loan again.
How personal loans can help in times of hardship
Contact your lender if you are unable to repay a personal loan. Many lenders offer hardship assistance. Often, a plan is developed on a case-by-case basis.
Ask your lender about how your hardship plan will be reported to major credit bureaus if it involves a suspension of loan payments. Your credit rating will be affected if you say late or miss payments.
