Hardship loans are fast cash loans you take out to cover emergency expenses. Although there is no standard for what constitutes a hardship loan, payday and title loan lenders may advertise their products as such. But while these forms of credit are accessible to borrowers across all credit profiles, they are high-cost forms of debt.
Here’s what you should know about these products, plus alternatives that may be safer and potentially more affordable when you need an emergency loan quickly.
What is a hardship loan?
Many emergency loans for bad credit, such as payday and title loans, are advertised as hardship loans. But “hardship loans” is just an umbrella term for loans that can quickly cover unplanned expenses; you aren’t limited to these two options. You may consider any of these safer alternatives:
For an incident to be considered a hardship, it should be severe and have an adverse impact on your ability to earn income or cover necessary expenses, such as living costs. Anyone can experience a hardship while they’re short on cash. Some examples of unexpected costs that can be considered a hardship are:
- Medical issues
- Unexpected job loss
- Funeral expenses
- Eviction or foreclosure
- Auto repairs
Beware these costly hardship loans
Predatory lenders often take advantage of the fact that hardship loans are a borrower’s last resort. They advertise fast cash with no credit check, which can be appealing to people experiencing hardships. But these loans come with high interest rates and short repayment periods, which can make them difficult to repay.
Borrowers looking for emergency loan help should always make sure they understand the terms and can keep up with the payments before taking out a hardship loan.
A payday loan is a short-term, small-dollar loan intended to be repaid out of the borrower’s next paycheck. The borrower will typically write a post-dated check for the amount plus the fees, which can be significant. The average two-week payday loan has an APR of almost 400%.
Because payday loans come with exorbitant fees and a short repayment period, many borrowers struggle to pay them back in the time allotted. As a result, four out of five payday loans end up getting renewed or rolled over. That leads to mounting fees and interest, which can trap borrowers in debt.
Car title loan
A car title loan is a type of hardship loan for bad credit that is secured by your vehicle’s title. You can get these loans online or at a title loan storefront. They’re very costly, with lenders typically charging at least 300% APR. Additional fees could push the cost of borrowing even higher than that.
These loans are risky because if you fail to keep up with the payments, the lender can repossess your vehicle. And this happens more often than you might think: About one in nine borrowers report facing repossession of their vehicle at the hands of a car title lender.
6 safer options for emergency funds
Payday and title loans may be a fast way to access cash in an emergency, but they’re not your only options. Below are some safer alternatives that can offer more affordable terms. Most offer funding or access to credit in around a week or sooner.
1. Credit card
When you need fast access to credit to cover an emergency cost, it’s hard to beat a credit card you have in your wallet, although you will pay for the convenience. Across all current credit card accounts, the average APR is 15.09%, according to data from our companion site CompareCards. While that’s certainly preferable to a payday or title loan, carrying a balance on a credit card can quickly lead to a cycle of debt that is difficult to overcome, so have a plan in place to repay your credit card debt.
If you can wait a few weeks for a card to arrive and have good credit, you could seek out a credit card that offers an introductory 0% APR to new customers. This type of offer lasts 12 to 21 months, meaning if you pay off your entire balance within that time frame, you’ll avoid fees. If you fail to meet the conditions of the offer, you’ll pay interest on the full amount from the original purchase date.
While there are credit cards for those with bad credit, they typically come with a high APR off the bat. These cards likely won’t be the best option for covering an unplanned expense, especially if it’s significant. Carefully compare the APRs on all loan products available to you before choosing a credit card.
2. Credit card cash advance
A cash advance involves using your credit card to immediately access cash, but it’s more expensive than charging an expense to your card. You can complete the transaction at an ATM, with a bank teller or by using a convenience check mailed by your credit card company. If you don’t have a PIN associated with your credit card, you’ll need to call your credit card issuer to set one up in order to use your card at the ATM.
With a cash advance, there’s typically an upfront fee, a limit to how much you can withdraw and an APR that is higher than what you’re used to paying on purchases. The average APR on a cash advance is about 24%, which can really add up if you’re not able to pay off the balance quickly.
3. Unsecured personal loan
If you have good credit, you may be able to get a personal loan quickly enough to cover your hardship. Depending on the lender, you can get an approval decision and funding within a couple business days. What’s more, unsecured personal loans typically come with far lower fixed APRs than payday and title loans, as well as repayment terms of 12 to 60 months.
For borrowers with less-than-perfect credit, a peer-to-peer lending marketplace, such as LendingClub or Prosper, may be an option, although the application process through funding can easily take one to two weeks.
To research personal loan lenders, you can use the loan marketplace LendingTree, our parent domain. You can apply for prequalification with a soft credit check, which doesn’t affect your score, to see loan offers. Prequalifying with a few lenders can help you compare the terms you may qualify for once you formally apply with a lender. Once you’ve chosen a lender you like, you can formally apply, which requires a hard credit check.
4. Secured personal loan
If you’re looking for quick online loans for bad credit, you might find that a secured personal loan will be easier to qualify for than an unsecured loan. As with unsecured personal loans, you can find these loans through banks, credit unions and online lenders.
You’ll need to provide collateral to secure the loan. Assets you can use to secure a personal loan include:
- Your car or other vehicle
- Your savings account or CD account
Secured personal loans can have comparable starting APRs to unsecured personal loans, but remember that the lowest unsecured loan rates tend to go to the highest credit scores. If you have bad credit, however, you might be able to get a lower APR with a secured loan, so it’s worth comparing your options. In any event, rates for secured personal loans are much more favorable than the APR on an auto title loan. Still, you should ensure you can meet the monthly payments before taking out a secured personal loan, since missed payments could result in losing your property.
Like unsecured personal loans, secured personal loans can be obtained online or through a bank or credit union. We’ve rounded up some competitive lenders for secured personal loans to assist your search.
5. 401(k) loan
With a 401(k) loan, you are technically taking out a loan from yourself, and the interest you pay goes back into your retirement funds. You can borrow 50% of your vested amount or $50,000, whichever is less; if you have less than $10,000 in savings, you can borrow up to the full amount, depending on your plan.
The application and funding process can take just a few days, and you wouldn’t need to submit to a credit check to qualify. You’ll make payments at least quarterly and repay the full loan amount within five years.
However, there are big drawbacks to this hardship loan option:
- You’ll miss out on future retirement savings on the money you borrowed.
- If you fail to meet the repayment schedule on your 401(k) loan, the remaining balance will be considered a distribution and subject to a 10% early distribution tax.
- Losing your job could drastically cut short the term of the loan.
- Terms and 401(k) loan availability depend on your plan sponsor, so this may not be an option even if you have a 401(k).
6. 401(k) hardship withdrawal
Some plan sponsors allow you to make a hardship withdrawal from your 401(k) account, which does not need to be repaid. You’ll need to demonstrate an “immediate and heavy financial need” to qualify, and the amount will be limited to what’s necessary to cover the expense. Still, you could have the funds within five to seven business days.
These distributions are subject to income tax but won’t be taxed an additional 10% if used for certain reasons, including the following:
- Total and permanent disability of participant
- Death of participant
- Unreimbursed medical expenses
- Certain military distributions
As with a 401(k) loan, be careful about taking money out of your retirement account, since it will interfere with your retirement security.
For those affected by the coronavirus pandemic...
Under the CARES Act, the 10% tax penalty is waived if you’ve been impacted by COVID-19. So if you or your spouse was diagnosed with the coronavirus or your finances have been adversely impacted by the pandemic, you can get a 401(k) hardship withdrawal without paying the penalty.