Coronavirus hardship loans: What are they and should I get one?

How to find funding to help during the COVID-19 pandemic. (iStock)

While the unemployment rate is declining, more than 13 percent of Americans are still out of a job. Stimulus checks and unemployment benefits help, but it may not be enough to cover financial obligations.

Many Americans may be considering taking out a coronavirus hardship loan. Similar to Paycheck Protection Program (PPP) loans, which are for businesses, this low-cost personal loan was created for people who have experienced a loss or reduction in their income due to COVID-19.

Unlike a personal loan that you can take out at any time, a coronavirus hardship loan is for consumers affected by the pandemic. If you’ve been laid-off or furloughed, you might qualify.

Is a coronavirus hardship loan the only option?

Hardship loans can be a good temporary fix for financial struggles during the coronavirus. But this type of financing isn’t your only option. If your credit is good, you may qualify for a personal loan that will offer a longer term for repayment. An online tool like Credible can help you compare personal loan rates from multiple lenders at once, and checking won't affect your credit score.

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Or, if you own a home, you could consider a refinancing that allows you to withdraw some of your equity, depending on your loan balance and property value. This type of loan is generally more significant than what you can receive with a hardship loan, which could tide you over for a more extended amount of time.

And reach out to institutions in charge of your current financial obligations to find out if they’re offering programs. Several mortgage lenders, utility, cell phone, or credit card companies, for example, are offering payment deferment. This could allow you to stay current on some obligations without incurring new debt.

The coronavirus' positive outcome is that several companies are taking a "we're all in this together" attitude, which can help you when it impacts your finances. By being proactive, you can ensure that the coronavirus is a temporary setback—one you’ll bounce back from as soon as possible.

What to expect if you opt for this type of loan

While business owners may have a portion of their PPP loan forgiven, coronavirus hardship loans will need to be paid back. Payments may be deferred for a period of time. The term of the loan is often short, such as 12 to 36 months. And the purpose is to tide you over until you recover from the hardship, which often limits the available amount to under $5,000.

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If you apply for a coronavirus hardship loan, pay close attention to the terms. They often come with consumer-friendly features, such as low or zero interest rates for a limited amount of time and deferred payments. You will want to check when these benefits end. If your situation doesn’t change by the end of your terms, you’ll need to discuss your options with the lender.

Who qualifies for this type of loan?

This type of loan is for people financially affected by the coronavirus. Those who have been laid-off or furloughed or who have lost their jobs may qualify.

Should you consider this over a personal loan?

If you’ve lost your job during the coronavirus and the stimulus payment isn’t enough to tide you over, you might consider taking this low-interest loan. Before signing the paperwork, however, determine how the debt could impact your budget. While the payment will be deferred, the interest may accrue. Be sure to consider how the amount will fit your current expenses when the repayment is expected to start.

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Also, if you've lost your job, be sure you have a clear path for being rehired before you take on an additional expense for the future. You will need to have a plan for repayment. If you aren't able to meet your obligation, you could incur late fees as well as damage your credit score.

Also, vet the lender. Some predatory lenders call their products "hardship loans," but they take advantage of vulnerable consumers. Ensure you check the lender to see if they have complaints with the Better Business Bureau and Consumer Financial Protection Bureau.

Where do you get this type of loan?

These loans are available at credit unions and banks. The Credit Union National Association (CUNA) reports that about 80 percent of credit unions are offering new loan products in response to the crisis.

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Many banks are also offering coronavirus hardship loans, with fee waivers, smaller amounts, and more favorable terms than a traditional personal loan. You can get a list of lenders from the American Bankers Association.

How do you apply for a hardship loan?

An excellent place to start is with a bank or credit union with which you have an existing relationship, although that isn't always a requirement. To apply, lenders will typically require a credit check as well as documentation to demonstrate your financial hardship and your expected ability to repay. If you're approved, you'll receive the funds within a few days.