Loans For Unemployed: Options & Processes - Upsolve (2023)

The effects of a job loss can go beyond an unemployed worker. These often devastating effects can extend to family, friends, and even the nation’s economy. Dealing with the financial hardships that come with unemployment can be difficult, but there are ways to keep your income flowing uninterrupted.

This article will discuss one of the ways that you can deal with the loss of a job—an emergency loan. Although you may think your employment status directly affects your ability to get a personal loan, especially in an emergency, that isn’t always true. In this article, we’ll talk about your options and the procedures for getting an emergency loan when you are unemployed.

Obtaining an Emergency Loan While Unemployed

You can obtain credit in many forms, including mortgages, vehicle loans, credit cards, secured finance purchases, and personal loans. Each form of credit serves a different purpose. You buy a house with a mortgage, a car with a vehicle loan, everyday household purchases with credit cards, and larger consumer items like appliances with secured financing. You can get just about anything else, depending on your needs, with a personal loan.

Sometimes you can save money by using one form of credit, like a personal loan, to pay off other high-interest debts that arise from other forms of credit. Debt consolidation, for example, allows you to consolidate multiple high-interest debts into a single, lower monthly payment.

Getting approved for a personal loan when you are unemployed can be challenging, expensive, and risky. But in the long run, an emergency loan can be worth it since it can help you financially when you’re not earning any wages. It can help reduce the financial stress caused by the loss of most, if not all, of your regular monthly income. A personal loan can offset some of this loss of steady income. An emergency loan can provide the money to pay for basic necessities like housing, food, and utilities. In addition to using credit cards, you can also deal with the loss of employment income by applying for a secured loan, line of credit, and/or home equity line of credit (HELOCs).

While the amount of your monthly income is more important than your employment status to most lenders, your monthly income is affected by your employment status. When applying for any personal loan, you’ll need to prove that you have an alternative source of regular income to offset the loss of your wages. If you are unemployed, the lender will likely take a closer look at your credit history, credit score, and credit report. If you have a good credit score, it should help qualify you for a loan with a lower interest rate and other favorable repayment terms.

The lender will also review your debt-to-income ratio (DTI), which compares your total amount of monthly debt with your total monthly earnings. Unemployment benefits are considered income when measuring your DTI. Even if a lender thinks your income is low or unstable because you are unemployed, you may still be approved for a loan. But it will probably have a higher interest rate and monthly payment than if you were employed. In the long term, you may also have higher overall loan costs.

Keep in mind that lenders tend to believe that your financial circumstances will not change in the short term. If a lender determines that you’re still a risk even though you have some income in the form of unemployment benefits, it may only offer short-term loans with short repayment periods and high interest rates.

Loan Types Available for Unemployed People

Personal loans can be either unsecured or secured. Examples of unsecured debt include credit cards, medical bills, and student loans. Mortgages and vehicle loans are examples of secured loans. An unsecured loan does not require any collateral, which creates a greater risk for the lender. As a result, unsecured loans are harder to get than secured loans, and they tend to have higher interest rates than secured loans. You may not qualify for an unsecured loan if you have bad credit.

If you apply for a secured loan, your lender will require you to provide some property as collateral or security for the loan. Pledging collateral for the loan makes you less risky. It assures the creditor that it will receive some money for the debt as long as the collateral maintains value. A creditor can foreclose on the collateral and sell it, using any proceeds to satisfy the balance of the debt. Note that you must repay a secured debt in a bankruptcy case if you want to keep the property that secures the debt after the bankruptcy.

Pros & Cons of Getting a Personal Loan While Unemployed

The biggest benefit of getting a personal loan when you are unemployed is that it offsets the loss of your wages. The largest drawback of getting any emergency loan is that you are taking on new credit at a time when you don’t have a job or steady income to repay it.

Another benefit of personal loans is that they cost less than credit cards over time. While credit cards are open accounts with no fixed term for repayment, personal loans have fixed terms. Unlike a credit card, personal loans require you to pay a set monthly payment amount over a defined term. This means payments don’t roll over each month and continue to accrue interest. Generally, if you have good credit, any available personal loans should have lower interest rates than those offered by most credit cards.

Taking Out a Personal Loan

Before applying for an emergency loan, you should review your current credit report and credit score to determine your overall financial health. Next, find a lender willing to work with unemployed borrowers. For example, SoFi and LendingTree are online lenders that consider applications from borrowers who are unemployed. Prequalification doesn’t affect your credit score, so you can see which loans you qualify for and compare interest rates and terms.

The terms and conditions of personal loans vary by lender. This means that you will have to investigate each lender in detail to know information like interest rates, repayment terms, loan fees, and other loan application costs. This investigation should help you find a personal loan that fits your needs. You can use a personal loan in an emergency to pay for necessities like housing, food, clothing, or utilities. Another way to use this loan is to pay off a large monthly expense and convert it into smaller, more manageable payments.

Eligibility Requirements for a Personal Loan

Lenders consider a range of factors when approving or rejecting a borrower’s loan application. These factors include income, debt-to-income ratio, payment history, credit history, and credit score. The weight that any factor has on final loan approval varies by lender.

As a potential borrower, you should always try to improve your financial standing. Take advantage of your free annual credit reports and monitor your credit regularly. Build new credit by only taking out sensible loans that you can easily repay each month. Paying your credit cards off in full each month and having no carryover balances is a good practice for increasing your credit score.

If you're struggling to pay your monthly debts and expenses, contact your creditors and explain your situation. They may allow you to pause your payments or offer deferment, forbearance, a new repayment plan, or other forms of assistance. Many lenders like banks, credit card issuers, utility providers, and landlords are offering financial assistance to people impacted by the coronavirus pandemic.

Alternative Income

The loss of a job has a major impact on your monthly income. Unemployment compensation will offset some of this loss. Fortunately, some loan providers are willing to lend to borrowers who provide proof of income from secondary sources like unemployment benefits, rental income, Social Security benefits, alimony, or child support.

Debt-to-Income Ratio

This number measures the percentage of a person’s gross monthly income that is used to repay debts each month. If your debt-to-income ratio is too high, a lender may use this as an indication that you don’t have enough income to pay both your debts and monthly expenses.

Here’s how to calculate your debt-to-income ratio (DTI): DTI = monthly debts ÷ gross monthly income.

For example, if your monthly debt payments were as follows:

• Mortgage payment: $1,200

• Vehicle loan: $300

• Credit cards: $400

• Student loans: $500

The expenses above total $2,400 in monthly debts. If your gross monthly income was $7,200, your DTI would be $2,400 ÷ $7,200, which is 0.333 or 33%. Is that good or bad? According to the federal Consumer Financial Protection Bureau (CFPB), it’s good. The CFPB advises homeowners to have a DTI ratio of 36% or less and for renters to have a DTI ratio of 15%– 20% or less with rent not included in this calculation.

The debt-to-income ratio is important because it helps lenders determine whether loan applicants have the financial resources to take on more debt. This may have the greatest effect on unemployed borrowers who have recently lost their employment income. Without stable wages, unemployed borrowers have debt-to-income ratios that are much higher than normal.

Credit Score & Credit History

Your credit score is determined by a variety of factors, including payment history, amounts owed, length of credit history, new credit, and types of credit. Each of these factors impacts your credit score by a defined percentage. For example, your credit history accounts for about 15% of your total credit score. Your credit history measures how long you've maintained each credit line and, during this time, whether the account has been in good or bad standing.

What’s a good or bad credit score? For lenders, generally, the following is true:

• A score of 300–579 is considered poor.

• A score of 580–669 is considered fair.

• A score of 670–739 is considered good.

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• A score of 740–799 is considered very good.

• A score of 800 or up is considered excellent.

Although the credit score needed for a personal loan varies by lender, you will still need a fairly good credit score to get a personal loan. Generally, you'll need a score of 550 or higher to qualify for a personal loan. If you need an emergency loan and don't have an adequate credit score, there are lenders who extend loans to borrowers with low credit. As might be expected, the interest rates tend to be high and the repayment terms are less favorable.

Taking Out a Secured Loan

When a borrower takes out a secured loan, they give the lender a security interest in (or a legal claim to) some kind of collateral. If the borrower fails to repay the loan, this security interest allows the lender to sell the collateral. Secured loans are easier to get than unsecured loans because creditors have collateral as protection. The drawback is that defaulting on the loan may cause you, as the borrower, to lose important property like a home or automobile.

Home Equity Line of Credit

If you are a homeowner, a home equity line of credit (HELOC) is an option if you have any equity available in your home. This home equity is your collateral for the HELOC. Because HELOCs are secured loans, lenders are willing to offer rates that are lower than unsecured personal loans. A home equity loan is a lump sum of cash, often with a fixed interest rate.

Car Title Loan

If you agree to a car title loan, your lender places a lien on your car's title. If you stop making loan payments, the lender can repossess your car. Unlike other types of financing, getting approval for a car title loan isn’t long or difficult. Because you are providing your car as collateral for the loan, approval for a car loan is relatively easy, even if you don't have a high credit score. But car title loans often carry interest rates that are much higher than even the highest credit card rates, and may even exceed 100%. Payday loans are a variation of this type of loan. These types of loans are illegal in some states and can be hard to get out of.

Other Options Available for People Not Approved for a Loan

If you cannot find a lender who will approve you for a personal loan, there are other alternatives. You can find a family member or friend who would be willing to cosign for a loan. If you have a credit card with available credit, you could also consider doing a cash advance. You could also try shopping for a smaller loan. You may have been rejected because you applied for too large of a loan.

A Cosigner

A cosigner with a good or better credit rating than yours may help you get approved for an emergency loan. A cosigner assumes a legal obligation to repay the loan if you don’t, which gives your lender additional assurance that the loan will be repaid. You might even get a better interest rate with a cosigner. But if you make any late payments or default on the loan, both your credit and your cosigner’s credit will be negatively affected. Keep in mind that using a family member or good friend as a cosigner and failing to repay the loan can ruin even the strongest relationship.

Credit Card Cash Advance

Most credit cards offer cash advances to their cardholders. These advances usually carry higher interest rates than normal credit card transactions. A cash advance increases your utilization of credit. This also increases your debt-to-income ratio, which may make it harder to get credit in the future. There also may be additional fees associated with this type of cash loan.

Lowering the Loan Amount

As mentioned above, lenders look at your credit score and credit history (aka your creditworthiness) when determining whether to loan you money, how much they’ll lend, and what the terms of the loan will be. If your personal loan application wasn’t accepted, it’s possible that your creditworthiness didn’t support the amount that you requested. Revise your loan application and request a smaller amount. Some amount is better than nothing.

Let’s Summarize...

Losing a job presents many hardships and challenges. How do you offset the loss of your wages after becoming unemployed? One option is to apply for a personal loan. Although you are unemployed, there are lenders that will make emergency loans to borrowers who have no wages or other employment income.

Lenders don’t just consider your job status to determine if you’re eligible for a loan. When lenders do a credit check, they look at your credit score, payment history, credit history, income, and debt-to-income (DTI) ratio. If you do not have any monthly wages, you will need to provide an alternative source of income like unemployment compensation. The bottom line is that you have options. Pursue them!