Coronavirus hardship loans: What you need to know

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As the U.S. contends with the coronavirus pandemic, many consumers are facing financial distress. The U.S. unemployment rate is at 8.4 percent, with 13.6 million people unemployed, according to the latest data from the Bureau of Labor Statistics. In response to the uncertainty of the current crisis, some financial institutions have developed coronavirus hardship loans to help consumers.

“A coronavirus hardship loan can help borrowers who have lost their income, or job, due to the pandemic,” says April Lewis-Parks, director of education and corporate communications at Consolidated Credit, a nonprofit credit counseling service. “Some of these loans offer low — or even zero — interest rate periods along with deferment or flexible repayment plans.”

If you’ve been financially affected by the coronavirus, find out how this relief option works and whether hardship loans are right for your situation.

What is a coronavirus hardship loan?

In March 2020, five federal regulatory agencies officially encouraged financial institutions to develop “responsible small-dollar loans” to consumers who’ve been affected by the coronavirus.

Coronavirus hardship loans, a type of personal loan, were created as a response by banks and credit unions to help their communities. These loans have the basic features of a standard personal loan, like a fixed interest rate, installment payment structure and predefined repayment term.

The main difference, however, is that hardship loans are designed specifically as short-term relief for borrowers affected by COVID-19 and have more favorable terms but lower loan amounts.

How does it work?

Each bank and credit union has different eligibility requirements and processes, but many are making it simpler to apply for a hardship loan. After supplying your personal information, like your name, Social Security number and income on the application form, applicants can typically receive a loan decision within minutes.

As with a traditional personal loan, lenders will review your income, creditworthiness and ability to repay the loan. If you’re approved, you can expect to receive funds quickly within two to three days in many cases.

Generally, the loan is for a low amount of about $1,000 to $5,000, although some institutions offer a higher loan limit. The interest rate and repayment terms offered for hardship loans also varies by institution. However, many credit unions are offering members automatic 90-day payment deferrals during this difficult time.

Who does it benefit?

“A hardship loan may be better for someone who needs around $5,000 or less and can pay back their loan in a relatively short time-period,” says Lewis-Parks.

If you’ve experienced decreased work hours or unemployment and are confident that you can regain income stability to repay the debt, a coronavirus hardship loan can help cover urgent expenses, like rent or groceries.

What are the requirements of a coronavirus hardship loan?

Many national credit unions are helping their members through this relief option. In fact, the Credit Union National Association reported that more than 80 percent of credit unions are offering coronavirus hardship loans to their members.

To take out a credit union-issued hardship loan, you’ll need to be a member. Credit unions have different fields of membership. For example, some credit unions require you to live in a specific city or region, work for a specific employer or have an affiliation with another group or association as its field of membership.

You may also be able to find coronavirus hardship loans at banks and online lenders, though these are less common. As with other loan products, you must meet the lender’s credit criteria and other underwriting requirements. Some financial institutions might also ask you to supply documentation about the financial hardship you’ve experienced due to the coronavirus.

Is a coronavirus hardship loan better than a personal loan?

The advantages of borrowing a hardship loan are a low interest rate, deferred first payment for up to 90 days and fast funding after getting approved. Some financial institutions even defer interest charges during the 90-day payment deferment period.

However, hardship loans are meant to be more short-term solutions than standard personal loans. With hardship loans, you’ll need to repay the balance within 12 to 36 months, while personal loans are offered with repayment terms of five years or longer. Personal loan borrowing limits are also typically higher, as some lenders offer prime borrowers up to $100,000.

How to apply for a coronavirus hardship loan

To apply for a hardship loan, reach out to a bank or credit union that you already have a relationship with as a first step. Learn if it offers an emergency hardship loan option that can help you fill financial gaps that resulted from the pandemic.

If you’re interested in joining a local credit union, you can search the National Credit Union Administration’s Credit Union Locator tool to find one near you. You can also search the American Bankers Association’s list of banks that are offering coronavirus relief options.

The bottom line

If the pandemic has affected your financial resources and you’re in need of temporary, emergency relief, a coronavirus hardship loan can help. Its favorable terms and low borrowing cost might be more affordable than using a high-interest credit card or borrowing a standard personal loan at a higher rate.

Remember, this hardship loan is still a loan that you’re required to repay. “Paying back a loan can be hard if a new source of income isn’t in someone’s future,” says Lewis-Parks. “People looking to take out these loans probably have other debts (such as mortgages and student loans), so those who take out hardship loans should know exactly how it will affect their budget.”

Lewis-Parks also cautions against predatory lenders that might use deception to exploit vulnerable borrowers in financial need. Borrowers are advised to vet their lenders through the BBB and other regulatory agencies before moving forward with a loan.

FAQ about coronavirus hardship loans

What are good interest rates for a coronavirus hardship loan?

Currently, coronavirus hardship loans are offering competitive interest rates compared to other loan products. Some lenders are even offering rates as low as 0 percent APR for qualified borrowers.

How much can you borrow?

Borrowing thresholds differ between lenders, but hardship loans typically offer low-dollar amounts of about $5,000 or less. How much you’re approved to borrow also depends on your credit score.

Who qualifies for a hardship loan?

Applicants whose credit history demonstrates positive borrowing behavior, like on-time payments and no defaults or delinquencies, qualify for a hardship loan. Banks and credit unions might also have deposit or income requirements that could affect your application.

If you’re applying for a coronavirus hardship loan through a credit union, you’ll need to be a member of the institution.

Is a coronavirus hardship loan my best option?

While a hardship loan could be your only choice in some circumstances, avoiding more debt is always a better option. “Depending on the reason you need the loan in the first place, try to negotiate your bills or expenses,” says Brandon Renfro, CFP.

Your existing creditors might have payment relief options, like short-term deferment, that you can explore during this crisis. You can also work with your lenders on lowering your payments temporarily while you regain financial stability.

This also extends to other major expenses, like housing. If you’ve been a reliable tenant and have credibility with your landlord, for example, Renfro suggests negotiating for partial forgiveness on missed rent.

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