What Are Hardship Loans & How Do They Work?

Sulaiman Abdur-RahmanUpdated May 25, 2023

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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.

Hardship loans are generally low-interest financing that may be available to people who have suffered economic distress from a major storm, tornado, or other declared disaster. An Economic Injury Disaster Loan (EIDL) from the U.S. Small Business Administration (SBA) is an example of a hardship loan.Organizations impacted by the Covid-19 pandemic could previously apply for a Covid EIDL until the SBA closed the online application portal in May 2022. Below we describe how eligible businesses and individuals may take out hardship loans.

What Is a Hardship Loan?

A hardship loan is generally low-interest financing that may be available to homeowners, renters, or employers who have suffered economic distress from a major declared disaster. Homeowners, renters, nonprofit organizations, and businesses of all sizes in a declared disaster area may be eligible for SBA disaster assistance programs.Small businesses, small agricultural cooperatives, and most private nonprofit organizations that have suffered a substantial economic injury in a declared disaster area may be eligible for a non-Covid EIDL. The interest rate on a non-Covid EIDL will not exceed 4%, which is a relatively low rate compared with the average personal loan interest rate.A hardship loan is not your typical consumer loan — it’s financing that may be available to you in times of hardship when other financing may not be available.Recommended: Emergency Small Business Loans

What Can a Hardship Loan Be Used For?

A non-Covid EIDL hardship loan may be used for the following purposes:

Working capital
Continuation of health care benefits
Rent
Utilities
Fixed debt payments

What Are the Repayment Options for a Hardship Loan?

Hardship loans from the SBA may have a repayment term of up to 30 years. This includes non-Covid EIDL financing and other SBA disaster assistance loans.Some lenders may offer large personal loans of up to $100K, whereas the SBA offers hardship recovery loans of up to $2 million.Recommended: 7 Ways to Manage Your Covid-19 EIDL Loan Difficulties

What Are Alternatives to a Hardship Loan?

Below we highlight some alternatives to a financial hardship loan:

Personal Loans

Economic hardship is not required to get a personal loan, but personal loans can be used to cover major expenses during times of hardship. Borrowers with good or bad credit may qualify for emergency personal loans. There are a variety of personal loan uses, including paying for emergency repairs to your home or car. Personal loans may be an option if you’re facing unforeseen struggles. For example, you may consider getting an emergency loan if you need funding to pay for medical bills. Personal loans can have repayment terms ranging from 12 months to seven years, and some lenders may offer longer terms.You may also consider getting a personal loan with a cosigner. A cosigner accepts the financial responsibility of repaying a loan if the primary borrower fails to make a required payment.

Borrow Against Your Life Insurance Policy

You may borrow or withdraw funds from a life insurance policy if you have sufficient cash value in a life insurance plan. Taking a personal loan against your life insurance policy has certain pros and cons.Borrowing from the cash value of your life insurance policy doesn’t require a hard credit check, but you risk losing your life insurance policy if you fail to repay the loan.

401(k) Loan vs 401(k) Withdrawal

Some employees with a 401(k) retirement plan may have the option to take out a 401(k) loan or a 401(k) withdrawal. A 401(k) withdrawal is not the same thing as a 401(k) loan. A 401(k) loan is borrowed against your retirement plan, whereas a 401(k) withdrawal permanently removes money from your retirement savings.Employees who take out a 401(k) loan are expected to repay the loan in full, usually within five years. Eligible employees may borrow up to $50,000 from a low-interest 401(k) loan, and the interest is paid back to yourself (minus fees potentially).One of the downsides to a 401(k) loan is the money borrowed is taken out of the market and will not participate in any market gains, which will adversely affect the growth of the retirement funds.Meanwhile, a 401(k) withdrawal — also known as a hardship distribution — is typically subject to income taxation and penalties if you’re under the age of 59½. You cannot repay a 401(k) withdrawal.

The Takeaway

Hardship loans may come in handy if you’ve experienced economic injuries in a declared disaster area and need financial assistance. Exploring other funding options may be right for you if you’re not eligible for a hardship loan.If you need a personal loan, Lantern by SoFi could help. Just fill out a simple form and view personal loan offers from different lenders.Compare personal loan rates and apply in minutes.

Frequently Asked Questions

Is a hardship loan hard to get?

What do I need to qualify for a financial hardship loan?

Do I have to pay back a hardship loan?

Can businesses still get EIDL funding?

Why should I apply for a hardship loan?

Photo credit: iStock/Hispanolistic

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About the Author

Sulaiman Abdur-Rahman

Sulaiman Abdur-Rahman writes about personal loans, auto loans, student loans, and other personal finance topics for Lantern. He’s the recipient of more than 10 journalism awards and served as a New Jersey Society of Professional Journalists board member. An alumnus of the Philadelphia-based Temple University, Abdur-Rahman is a strong advocate of the First Amendment and freedom of speech.

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