Finance

7 Best Hardship Loans for Borrowers With Bad Credit

April 8, 2022

If you’re going through a tough financial time—whether due to high medical costs, job loss, or a significant issue with your housing—you might need a little extra help to make it to the other side.

Do you need a loan but have been refused everywhere?

The first thing to do is take a deep breath and realize you’re not the first person to have a bad credit score or a rough patch. On top of that, there are ways to find hardship loans for bad credit as well as alternatives.

In this short guide, we’ll take a look at seven potential options hardship loans for people with bad credit scores.

1. 401(k) Hardship Withdrawals

A hardship withdrawal from a 401(k) retirement account may be where the idea of a hardship loan for bad credit began. The law doesn’t require that 401(k) plans make hardship withdrawals available, but it does regulate them stringently if they’re present.

The first criterion for eligibility is possessing a 401(k) in the first place. Then, check with your plan to see if it allows for hardship withdrawals. Once those requirements are met, regulations then include:

Last resort – You can only apply for these emergency funds as a last resort.
Usage limits – You have to apply to use the withdrawal for a specific purpose and can only use it for that purpose. Some acceptable uses may include:
Repairs to or downpayment for a primary residence
Costs related to eviction from or a threat of foreclosure on your home
College education costs
Out-of-pocket medical expenses
Family or beneficiary burial and funeral expenses
Taxation – You’ll owe income tax on the withdrawal even if you repay it.
Penalty – If you’re under 59½, you’ll also pay a 10% penalty on the withdrawal.
Contributions gap – You’ll have to wait at least six months before you can start deferring money from your paycheck to your 401(k) again.

As you see, this type of loan often comes with obstacles that make it difficult to access. However, your credit score has nothing to do with it, so if you’re a borrower with poor credit, emergency circumstances, and a qualifying 401(k), it’s an option.

Just make sure that you’re comfortable with depleting your retirement savings and paying fees on the loan.

2. Home Refinancing

If you’re a homeowner who’s built up equity in your property, some lenders will work with you regardless of your credit score.

A cash-out home refinance replaces your current mortgage with a new, larger mortgage. The difference between the two is your cash out, and you can use it however you’d like:

The maximum amount of cashback is based on how much equity you own in your home. Lenders will usually cap it at 80% of your equity.
Just as with your first mortgage, a refinance comes with closing costs. If you can’t afford these out of pocket, they can be rolled into your loan. Keep in mind that this affects the total amount you’ll pay over time (both principal and interest).
If your credit score is lower than when you took out your original mortgage, your interest rate will likely be higher. Likewise, if current interest rates are higher, you can expect to pay more in interest. Nonetheless, it’s possible to get refinance with bad credit.

Finally, your lender’s risk is balanced against the possibility of foreclosing on your home. It’s not their ideal outcome, as they may not always recoup their investment, but it does provide collateral in case you default.

Refinancing or borrowing against your home equity shifts some of their risk to you since you’re adding to the possibility of losing your home if you can’t meet the repayment term.

During a difficult financial hardship, weigh the benefits of ready cash with the costs of higher monthly mortgage loan payments.

3. Home Equity Loans

Don’t want to go through the process of refinancing? There are other potential ways to take out loans against your home equity.

Home Equity Loan or Second Mortgage

With a home equity loan for bad credit, you’re applying for a fixed-rate loan for a specific amount of money. As with a refinance, your home acts as the collateral.

A home equity loan is often called a second mortgage because this lender is second in line to recoup their investment if you default on your loan (after your primary mortgage holder). This additional layer of risk means that you’ll generally see a higher interest rate than with your primary mortgage, depending on market conditions.

Home Equity Line of Credit (HELOC)

A home equity line functions a bit like a credit card.

Your line of credit allows you to borrow up to a maximum amount during a draw period. Once that draw period ends, you’ll start repaying the loan based on how much you used. This is a common approach for projects like home remodels, where you have a ballpark of the costs that’ll come in over a period of months but don’t know the exact amount.

However, HELOCs can be used however you want.

Like a home equity loan, a HELOC acts as a second mortgage. Unlike a home equity loan, a HELOC with bad credit is a variable interest rate loan, so your payments and total cost may increase over time if interest rates rise. Rates will be a bit higher than with a home equity loan, but lower than a traditional credit card.

4. Accessing Home Equity Without Refinancing

A newer route to leveraging your home equity is through a sale-leaseback. While working with traditional lenders is full of roadblocks and hurdles even for borrowers with fair credit, a sale-leaseback solution can help to ensure homeowners—especially those who have been historically overlooked by big lenders—use the equity they’ve worked hard to build.

Through sale-leasebacks, homeowners who have been making mortgage payments over time can convert their equity to cash without restrictions based on income, debt-to-income ratio, or credit history.

5. Secured Personal Loans

A personal loan is usually an unsecured loan, meaning the lender is basing the loan on the likelihood that you’re a good bet to pay it back. That means bad credit is usually an obstacle.

As the name suggests, secured loans are secured with collateral. For example, home equity loans use your house as collateral. However, there are other kinds of secured loans that put up property—say, a car or piece of jewelry—as the collateral. A lender may be more willing to offer a loan to someone they see as a high risk if they can seize an asset to recoup their investment.

The flip side, of course, is that you’re at risk of losing your property if you default on the loan. Be sure you understand:

Collateral risk – Do you have any grace periods after missing a monthly payment date before the lender assumes legal ownership of your property?
Predatory lending traps – Some hardship loans for poor credit structured around personal collateral are considered predatory lenders. Car title loans, payday loans, and pawnshops often charge huge interest rates and fees. These are loan types to consider only as a last resort.

6. Co-Signed Loans

Some lenders are willing to work with a co-signed contract to:

Approve a loan to someone with bad credit
Improve the interest rate or term of the offered loan

In short, a co-signer is someone who agrees to take responsibility for the debt if you fail to repay it.

Just like a secured loan, this arrangement helps the lender reduce their own risk. But it’s a big risk for a co-signer to take on since they’re legally agreeing to pay back the full amount of the loan if the original borrower defaults.

While you may be able to find a close family member to cosign, be sure you understand the risks to your relationship if you fail to make good on your payments and promises.

7. Peer to Peer Lending

Like crowdsourcing, micro-lending and micro-investing have allowed individuals to become directly involved in financing that was once only in the hands of banks and brokers. Peer to peer lending platforms such as Peerform, Prosper, and Upstart have lower minimum credit score requirements and bad credit borrowers may be able to access better interest rates than with traditional lenders.

Borrowers fill out an application that includes credit information and the requested loan details, and then select from loan offers that come in. Though a loan may be financed by multiple lenders, the borrower makes the loan repayment through the platform, which then splits the proceeds out to the investors.

While individual investors do consider the traditional credit scoring and debt-to-income ratio factors, they are often willing to grant loans to borrowers based on supplemental information like:

A good reason for a loan
A steady work record
Understanding the circumstances behind a poor credit history

This can be an exciting opportunity for subprime borrowers, but you’ll need to check availability in your area. Some state laws prohibit access to peer-to-peer lending.

A Better Way for Homeowners With Bad Credit to Access Hardship Funds

When you don’t have a high number on the credit score scale, your options for accessing emergency funds are limited. Many of the available options offer predatory interest rates or a loan term that can put your long-term financial health at risk. A hardship loan isn’t always the right option for those with bad credit.

The money you need for family and medical emergencies or other crises can come at a cost that will only dig you further into trouble.

But if you own your own home, you have a valuable source of funds to help with any hardship.

Sale-leaseback programs can help with a range of solutions that keep your home secure while meeting your urgent financial need. Consider contacting a financial advisor to learn more about your options.

Key Takeaways

If you’re going through a tough time financially, you might need a little extra help to make it through to the other side. Have you been refused to receive a loan? If you’re seeking a solution, try a hardship loans for people with bad credit. If you are still unsure of alternative options to help you during this financially hard time, consult a financial advisor to learn more about your options.

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