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How Does a Hardship Loan Affect Your Credit?

Are you considering a hardship loan to help meet expenses? If you've lost your job or used up your emergency savings, a short-term loan might get you through a tough financial patch—especially if you expect your financial outlook to improve. But before you apply, make sure the loan you're considering will actually advance your financial position and help you preserve your good credit. How a hardship loan impacts your credit depends on a variety of factors and, importantly, not all hardship loans are alike.

What Is a Hardship Loan?

A "hardship loan" may be more of a marketing term than a technical one, says Rod Griffin, senior director of public education at Experian. "Typically, these are small-dollar, short-term personal loans that are meant to help people get through difficult times," Griffin says. "Some may carry a slightly higher interest rate because they're being marketed to people who are experiencing financial difficulty."

Who offers hardship loans?

  • Personal loan providers specialize in uncollateralized loans, although they aren't necessarily called hardship loans.
  • Government programs may exist to help people in need, particularly if you're looking for a small business or agricultural loan. Check this interactive government loan finder for federal resources, or investigate programs in your state or local area.
  • Employers and employee groups may offer loans to employees, such as programs for federal employees.
  • Credit unions often provide hardship loans to their members and may feature relatively low interest rates.
  • Banks don't always offer these types of loans, but it never hurts to check with your bank for options.

Not all lenders who advertise hardship loans are great options, however. Some loan offers are scams, while others may come from predatory lenders that charge triple-digit interest rates and give you only a few weeks to repay. These loans make it difficult to get out of debt. Because the term "hardship loan" can mean so many different things, it's critical to gather and verify as much information as possible before you apply for a loan.

How Do Hardship Loans Impact Your Credit?

When considering a prospective lender, it's important to find out how the loan will affect your credit. Griffin suggests asking any lenders you're considering the following questions:

  • Will you perform a credit check?
  • Will this loan be reported to the credit reporting agencies?
  • Will it be reported as an installment loan?
  • If the lender doesn't report the loan as an active account, will late payments or other negative issues be reported?

"If a lender is reporting your loan, it should appear as an installment loan on your credit report, along with the principal loan amount, your payment history, whether or not your loan is current, and so on," Griffin says. "You shouldn't see any surprises from a credit reporting perspective."

As with any loan, keeping up with your monthly payments until your debt is paid off will typically raise your credit score; falling behind will send your score in the opposite direction.

What if your lender says they'll skip the credit check and credit reporting? This may not be great news, says Griffin: "Payday or title loan lenders may position their loans as hardship loans, but high interest rates and extremely short payoff periods make it easy to get trapped in overwhelming debt." A lender that's promising fast cash with easy qualification or no credit check—especially coupled with high interest rates, exorbitant fees and/or a quick payoff term—is probably making you an offer you should refuse.

Alternatives to Hardship Loans

If a hardship loan doesn't sound like the right fit for you but you still need emergency cash, consider these alternatives:

  • Personal loans: Private lenders offer a wide selection of personal installment loans you can use for almost any purpose, including as an emergency loan when you're short on funds. Rates and fees vary by lender and your credit score, and you will need to demonstrate your ability to repay. You can use the Experian CreditMatch™ online tool to compare lenders and loan offers.
  • Hardship assistance: Although it isn't cash in hand, you may be able to defer monthly loan or credit card payments by contacting your lenders directly and asking for hardship assistance.
  • Credit card cash advance: Cash advances often come with fees and high interest rates. In a pinch, though, they can be a source of ready funds that won't put you through a credit application process.
  • Hardship distributions from your retirement account: Some plans offer hardship withdrawals from your 401(k), 403(b) or 457(b) account. Raiding your retirement isn't optimal, and criteria to qualify for hardship distributions vary. Ask your retirement plan administrator for details. If your plan offers 401(k) loans, this might be another option to consider.
  • Nonprofit programs: Organizations in your area may be able to help you cover the cost of food, housing, utilities and more while you regain your financial footing. Or consider a nonprofit lending circle such as Mission Asset Fund for nontraditional, low-interest loan options.

How to Prepare for the Next Hardship or Emergency

Once this rough patch is behind you, think about how you can prepare for the next financial emergency. Although it may not be possible to prepare for every unexpected financial turn, you can take positive steps to fortify yourself against future surprises.

Create a budget with built-in savings. A monthly budget helps you rein in spending, and it can also help you build an emergency fund. The key is to stick to your budget and save regularly. Having three to six months' worth of expenses will help defuse the impact of any future financial setback.

Mind your credit. Available credit is a valuable resource when you need funds; good credit helps you access loans and credit when you need it. You can stay on top of your credit score and report with free credit monitoring from Experian, so you can ensure you'll have the best possible options if you ever face a moment of hardship again.