What Are Hardship Loans & How Do They Work?

Sheryl Nance-NashUpdated December 28, 2021

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Editor’s note: Lantern by SoFi seeks to provide content that is objective, independent and accurate. Writers are separate from our business operation and do not receive direct compensation from advertisers or partners. Read more about our Editorial Guidelines and How We Make Money.

Whether it’s due to unexpected strains from the COVID-19 pandemic, a job loss or a reduction in hours, many have experienced a loss of income in recent years, leading to a financial predicament. If you’ve been wondering where you can turn for help, you might consider a hardship loan.Though these COVID-19 personal loans involve taking on debt like any other type of loan, the flexibility they offer in how you can use and repay them may offer a much needed bridge over troubled waters. Read on to learn more.

What Is a Hardship Loan?

A hardship loan is a personal loan that allows you to borrow money during a time of financial crisis. Hardship loans tend to have low interest rates, and are typically offered in smaller amounts, generally ranging from $500 to $5,000. Repayment terms are usually between 12 and 36 months, though hardship loans often offer deferred repayment options to give you some breathing room when it comes to paying back the funds.

How Do Hardship Loans Apply to the COVID-19 Pandemic?

In light of the financial damage caused by the pandemic, financial institutions began offering coronavirus hardship loans to help those who lost jobs, experienced a reduction in pay or were otherwise financially affected by the pandemic. Kind of like emergency loans for businesses, these loans can offer a life raft for everyday consumers during this ongoing crisis.Many credit unions and some banks are currently offering these loans, which they may also refer to as disaster assistance loans, coronavirus hardship loans or coronavirus relief loans. The American Bankers Association has compiled information on which banks are offering financial relief during the pandemic. You can also visit a bank’s website for information. In addition to looking at financial institutions’ websites, it might be worth popping into a local branch, as some lenders may not actively promote the fact that they offer hardship loans. If you go in person and share your situation, they may be willing to work with you.

What Can a Hardship Loan Be Used For?

Much like other personal loans, coronavirus hardship loans offer flexibility in how you can use them. For example, you can use the money for costs including:

Groceries
Rent
Mortgage payments
Gas
Medical bills
Utilities
Car payments

Recommended: Guide to Saving Money on Groceries

What Are the Repayment Options for a Hardship Loan?

While repayment will vary by lender, you generally can expect to have to pay back the money you borrow in one to three years. Your specific repayment terms will likely depend on what your overall financial situation is like and how much money you’re borrowing.One feature of a hardship loan that can further help you out is the payment deferral period. Some lenders may allow you to defer payment for 60 days to possibly as long as 120 days.

Who May Qualify for a COVID-19 Hardship Loan?

Each lender has their own criteria and policies when it comes to who qualifies for a hardship loan, so you’ll need to be diligent in your search to determine the differences. In general, however, when you apply for a COVID-19 hardship loan, you’ll be asked what you plan to use the money for. The financial institution may also request documentation demonstrating how you’ve been impacted by the pandemic. You’ll also likely need to meet similar loan requirements to what you’d need when applying for other types of loans, such as sharing your credit history and proof of income. However, given the pandemic, lenders are making adjustments that could work in your favor. If you have a low credit score, for instance, you may still be able to get a hardship loan.Also keep in mind that if you’re applying for a hardship loan at a credit union, which is where many of these loans are being offered, you will need to be a member. Banks may require you to have an existing account to seek a hardship loan.As you research your options and consider applying, it’s important to be wary. During the pandemic, scammers have unfortunately been working overtime preying on people who find themselves vulnerable. Here are some general tips to keep in mind:

Work with a reputable institution for your loan: If you’re not familiar with a company, take the time to do your homework. Visit the company’s website, read online reviews, check for complaints on the Consumer Financial Protection Bureau’s website and more.
Be mindful of providing sensitive financial information: This includes your Social Security number, date of birth and other personally identifying information.
Watch out for sky-high APRs: Know, too, that there are payday lenders who may dress up their products and call them hardship loans when they are in fact payday loans with exorbitant interest rates that they will likely want you to repay in short order.

What Are Alternatives to a Hardship Loan?

A loan is only a viable option if you can pay it back. If you’re unsure a hardship loan will be the answer to your problems, there are other strategies and solutions out there to help get you through tough times.

Defer payments

Early on many banks, credit card issuers, utility companies and others were allowing people to defer payments. Check with those you owe to see if they have any such measures in place; even if they don’t, they may be able to work out a special arrangement for you. The goal is to protect your credit — you don’t want a temporary situation to have a long-term impact on your finances.

Turn to your employer

During the pandemic, many companies have stood by their employees by offering hardship cash grants. If you’re in need of some assistance, check with your human resources department to see what, if anything, is available. Even if your company doesn’t offer cash grants, HR may be able to point you to valuable resources. You could also ask your employer for an emergency loan that you will repay. Recommended: 12 Types of Personal Loans: Pros & Cons of Each

Take advantage of local resources

Another option is to dial 2-1-1, a national nonprofit that provides financial support. If you call 2-1-1 where you live, you'll be connected to charities and other types of aid in your area.Also consider checking your city government’s website. They may have information about local programs for people affected by the coronavirus.

Consider getting another type of loan

A hardship loan might not be the right type of loan for everyone. You could also consider withdrawing money from your 401(k) account and paying it back at a later date. Because this is your retirement money, however, you shouldn’t make this your first choice just in case you are not able to pay it back as you planned. If you are an entrepreneur, explore loans that are designated for businesses to help you get through hardships like the pandemic. For example, you could use an EIDL loan to cover costs like payroll and rent. Check the EIDL loan requirements to see if you meet them.Recommended: Personal Loan Against Life Insurance Policy

The Takeaway

The last couple of years have been a roller coaster — and, for some people, there have been more downs than ups. A hardship loan could come in handy if you’re in a pinch financially. Still, keep in mind that it’s always a commitment whenever you take on debt, so it’s important to make sure you are in a position to pay back the loan in a timely fashion. To find hardship loans, research credit unions, banks and online lenders, taking into account interest rates, repayment terms, fees and more. Though your situation may feel dire, take the time needed to find the right lender for you.Apply for online personal loans in minutes with Lantern by SoFi.

Photo credit: iStock/Hispanolistic

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About the Author

Sheryl Nance-Nash

Sheryl Nance-Nash is a freelance writer specializing in personal finance, business, and travel. Her work has appeared in Money Magazine, Newsday, The New York Times, Business Insider, BBC.com, AARP the Magazine, ABCNews.com, Forbes.com, among others.

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