Due to unforeseen COVID-19 pandemic strains, job loss, or reduced hours, they result in a dire financial problems. If you have been thinking about your financial assistance, you may want to explore the hardship loans which we will clarify it in this article.
List of Contents
What Exactly Is a Hardship Loan?
A hardship loan is used to compensate for an unexpected financial shortfall caused by an increase in expenses or a decrease in income. Nevertheless, it is not like other types of loans intended to meet an anticipated or planned need, like a car loan or a business expansion loan. Significantly, a hardship loan is intended for situations where you cannot pay your bills.
5 Types of Hardship Loans
Genuinely, there are numerous types of hardship loans to satisfy a variety of situations. Here are a few examples.
1. Personal Loan
A personal loan can be obtained for nearly any purpose, including financial distress. This is a loan with installments. Your monthly payment and interest rate will remain the same during the loan duration.
To qualify for a personal loan, you must meet all of the lender’s requirements, including their minimum credit score. The borrower’s credit score, loan amount, and loan period determine the interest rate. Typically, shorter payback terms are accompanied by a reduced interest rate. Whether you choose an online lender or a local bank does not matter. However, you should comparison it for the best interest rate and lowest costs.
Significantly, suppose your credit score is insufficient to qualify for a personal loan or to obtain a manageable interest rate. In that case, you may be able to expand your alternatives by applying for a secured personal loan. For a secured loan, collateral is required. For instance, if you own a Certificate of Deposit (CD) account, a particular savings account that offers a higher interest rate but restricts access to your funds for a set time, you may be able to borrow against it. Additionally, you can use the following as collateral for a personal loan:
- Your house
- Your car or boat
- Jewelry or other valuables
- Insurance
2. Medical or Veterinary Care Loan
Unpredicted medical costs are the primary source of monetary distress. It would be best if you contacted the healthcare provider to request a discount on your bill. Additionally, they may be willing to establish a payment plan that fits your budget.
If you predict future medical expenses, you may want to explore a medical loan or medical credit card. Typically, if you are able to make each payment on time, this form of loan for medical expenses is free. However, you still have to be cautious. Generally, financing for medical expenses includes deferred interest. If you do not pay off the entire sum before the end of the loan period, you must pay interest on the total, including the amount you have already paid off.
Similarly, you can fund medical care for your cat. There are specific financing programs available for this purpose. Obtaining a personal loan or utilizing a credit card are further alternatives.
3. Emergency Home Repair Loan
As we know, home ownership is expensive. In addition to the mortgage, insurance, taxes, and homeowners association (HOA) fees, you will incur ongoing maintenance and repair expenses. When your water heater fails, you may need to pay several thousand dollars to replace it. Moreover, it would help if you acted quickly, as you have cold showers in the meanwhile.
4. Payday Loan
A payday loan is a kind of cash advance that is only for a short period. The majority will be automatically refunded from your bank account on your next salary. Payday loans are regarded as predatory. This means that the loan terms are abusive and inequitable to the borrower.
The traditional payday loan provides rapid cash at exorbitant interest rates. However, you may not realize how expensive they are when you take a loan. Most payday loan borrowers become locked in a debt cycle as it can be complicated to repay the loan plus all costs by the due date. Even if you pay off your loan, you may be short on finances for the next month, forcing you to take out another loan. As a result, payday loans should be avoided because they are pretty expensive.
5. 401(k) Hardship Withdrawal
If you have an immediate and significant financial need, you may be eligible to borrow from your own 401(k). Your employer must provide this functionality. Furthermore, the funds can only be used for the following.
- Burial and funeral expenses
- Tuition and fees (up to 12 months)
- Certain medical expenses
- Certain primary house acquisition and repair costs, as well as expenses incurred to avoid eviction or foreclosure
Things to Consider before Enrolling the Hardship Loans
1. Deferment And Forbearance
In some instances, you may be able to tackle a financial emergency by working with an existing lender.
Sometimes, mortgage payment forbearance is available, particularly if the epidemic disrupts your income. Forbearance provides the advantage of deferred payments, but interest continues to accrue. When you begin payments following most mortgage forbearance programs, you must make up all missing payments. It is not a good solution for the majority of people. Rather than incurring a huge charge that would increase your monthly financial commitments, you might be better off obtaining a hardship loan to meet the payment.
You can call your mortgage servicer to inquire about any available relief programs or forbearance plans. Also, depending on your income and the specifics of your loan, you may be eligible for a modification that permanently reduces your monthly payment. However, auto and personal loans do not offer postponement or forbearance options.
2. Debt Relief
When you are financially worried, debt relief solutions may leap off your television screen. It is very simple to be enticed by services that promise to assist you in settling your obligations and obtaining immediate relief. To be clear, it is highly improbable that you will be able to settle your debts for pennies on the dollar. Moreover, if your credit score is not already low, you will destroy it for years.
In most cases, you will be expected to cease paying all of your payments and make a single monthly payment to the debt relief business. Once your bills are sufficiently delinquent, the company begins making creditors lowball offers. This procedure takes years, and its success is uncertain.
Conclusion
In conclusion, as we know, the last few years have been a roller-coaster ride. Thus, some individuals experience more downs than ups. Significantly, a hardship loan could be useful if you are in financial trouble. However, keep in mind that incurring debt is always a commitment, so it is essential to ensure that you can repay the loan on time.
FAQs
A hardship loan is a type of loan meant to assist people suffering financial problems due to unforeseen circumstances such as job loss, sickness, or other unexpected events.
It is possible to obtain a hardship loan despite having bad credit, but this will depend on the lender and the type of loan. Lenders who specialize in helping persons with bad credit may be more ready to give out hardship loans, but the conditions and interest rates may be less advantageous.
It may be possible to use a hardship loan to pay off other obligations, but you should carefully analyze the loan’s conditions and interest rates before doing so. Combining debt with a hardship loan may bring some relief, but it may also lead to more serious financial troubles if you are unable to repay the loan.
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Source: Fool