We’re six months into the COVID-19 pandemic. Millions have lost their jobs and are struggling to stay afloat. Payment deferral, eviction moratoriums, unemployment benefits and stimulus checks helped, but more assistance is needed. Congress and the White House are at odds about a second pandemic relief package, but there is an option for people who need help right away.
Many banks and institutions have stepped up and are offering coronavirus hardship loans. There are advantages and disadvantages to these loans, but it’s an option worthy of exploration to help shore up your finances during the pandemic.
Coronavirus hardship loans, explained
It’s important to understand that the Federal Deposit Insurance Corporation (FDIC) has actively encouraged banks and lenders to help those impacted by COVID-19, and these institutions have largely stepped up. Also, consider two recent surveys, one from the research institution NORC at the University of Chicago and the other from Prudential and Flexjobs.
Of the 2,000 respondents to the NORC survey, nearly 25% report losing savings and about as many have lost income. Over 1,000 people participated in the Prudential and Flexjobs survey, and 53% said they were earning half or less of their pre-pandemic income.
There’s certainly a financial need out there and not just for people who are unemployed. So, how can a hardship loan help?
[Read: Emergency Loans for the Unemployed]
“Coronavirus hardship loans are short-term personal loans that financial institutions are offering to individuals affected by the pandemic,” says financial freedom strategist Dr. JeFreda Brown. “Financial institutions determine the loan amounts. Interest rates range, just like a regular personal loan, and can be as low as 3% for people with better credit.”
Hardship loans have some distinct advantages. For starters, once approved, the money is deposited in your account within days. Also, there’s flexibility when it comes to repaying what you owe. Terms vary for different institutions, but the payback period typically falls between three months and five years. However, there are some drawbacks to this type of loan.
The total you can receive is smaller, with most lenders capping these loans at $5,000. Also, keep in mind that this type of funding is meant to be a stopgap for paying off bills and isn’t designed to support larger financial issues.
“Loan funds can only be used for specific expenses, such as a mortgage, car loan, food or medicine,” says Brown.
Applying for a hardship loan
The first thing to find out is whether your financial institution offers these types of loans. A report from the Credit Union National Association found that about 80% of credit unions offer some kind of pandemic-related loan. This is an encouraging sign. Still, you’ll want to contact your lender to find out more information and ask specific questions about fees and the terms of repayment.
Say your bank or credit union does offer a coronavirus hardship loan. Should you get started on the paperwork? Well, that depends.
“These loans are credit-based. It is not guaranteed that anyone who applies will be approved,” says Brown. “Applicants will have to provide proof that they have been financially impacted by the coronavirus and that they are able to repay the loan.”
[Read: How to Avoid an Eviction If You Can’t Pay Rent]
Do you have a good credit score? This is where it gets tricky. Chances are, if you need a hardship loan, you might not have the resources to bump up your credit score by paying down debt. You may be in a situation where you need money now and can’t wait. Keep in mind that if you apply and are approved, you might get saddled with a higher interest rate that could mean more debt in the short-term. Do the math and see what calculation works best for you.
Explore your financial options
Hardship loans are meant as a sort of quick fix. If you have a bit of wiggle room in your finances, consider these alternatives.
Interest rates haven’t been this low since 1971. If you own a home, this is a good time to refinance. As with most things financial, you’ll need a good credit score to get the most out of this option. Refinancing has the potential to save you hundreds of dollars a month. However, this option is only sound if you plan on staying in your house for at least a few more years. Since the refinancing process comes with fees, it takes a few years before you’ll start to see the savings. During that intermittent period, you’ll be paying off the fees incurred during the refinance.
[Read: What Is a Loan Modification and How Does It Work?]
Maybe you need financial help that’s more immediate. At the start of the pandemic, lenders and creditors developed programs to help customers deal with the economic uncertainty. If you haven’t done so already, consider asking for a deferment or a payment plan that fits your budget.
Also, if you have 401(k) plan, here’s another option to consider: The Coronavirus Aid, Relief, and Economic Security (CARES) Act relaxed restrictions when it comes to how people can access their 401(k). As of right now, people can withdraw up to $100,000 without being assessed a penalty. Early on, the money taken out couldn’t be put in again, but that rule has been lifted temporarily.
Too long, didn’t read?
Millions of Americans need financial assistance. Banks and lending institutions have stepped up, and many are now offering coronavirus hardship loans. These loans are smaller in value but offer a flexible payback schedule. Other financial options are available to people needing some help paying their bills, including refinancing, deferments or withdrawing from a 401(k).
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