About Hardship Loans

Credit card debt in America is a swirling, unending problem. The consumerism embraced by citizens--and politicians--creates an atmosphere of insatiability. Customers must have the new "it" thing, and lenders are all too willing to finance such purchases. Later, lenders may be called on to help strapped consumers pay down overwhelming debt -- often by the use of so-called hardship loans.

Basics

A hardship loan can take many forms. Most lenders offer a hardship or "rescue" loan of some variety. These loans serve to help consumers get back on their feet and begin paying down debt. Most hardship loans are not regulated by the federal government, but rather controlled internally by each individual bank or creditor. Applying for hardship loans usually means speaking with a loan counselor.

Types

Hardship loans can be simple reductions in debt. They can cancel credit lines or reduce interest rates. Often hardship loans are short-term--designed to allow a window of time for consumers to catch up on their payments. Sometimes hardship loans are complete restructures. For example, if a consumer is struggling to pay a revolving loan, a lender may change the loan into a closed-end variety so that a consumer cannot take on more debt and has a standard monthly payment.

Mortgages

Hardship loans are most common on mortgages. Keeping a borrower in his or her home is in the best interest of all parties involved with the mortgage. Sometimes a lender will grant a hardship loan, or a grace period, in which a customer can catch up on the interest payments. For example, if a customer is behind one payment, a lender may drop his or her interest rate to zero percent for six months.

Deferred Interest

Sometimes rescue loans readjust the payment schedule. For example, if a customer is behind two or three payments--and in dire risk of foreclosure--a lender may take the back interest due and place it at the end of a loan. This interest is added to the loan principal and re-amortized into the loan repayment schedule. This is the least desirable hardship loan, as it does not eliminate problems, just delays them.

Warning

Some unethical lenders will offer hardship loans that do not work in the best interest of the borrower. Such loans are designed to appear beneficial, but in fact sap more interest payments and fees from a vulnerable borrower. The Federal Housing Authority warns of such scams, and red flags can be seen on its website. (See Resources.)