No one is safe from layoffs. But not everyone has a sufficient nest egg to go through tough times. Your personal needs don’t disappear with the loss of a job, so additional financing can be an acute problem. More than that, people who are self-employed can also face financial difficulties. Thus, loans for the unemployed are a topical issue.
Luckily, there are several financing products that offer fast financial relief for people who have no official job. Let’s take a close look at the options available.
- What Factors Do Lenders Consider When Making a Personal Loan Decision?
- Is It Possible to Get a Loan When You’re Unemployed?
- Types of Loans Available for Unemployed
- How to Qualify for a Personal Loan If You’re Unemployed?
- Risks of Getting a Personal Loan While Unemployed
- How to Get a Personal Loan While Unemployed?
- Personal Loan Alternatives for Unemployed
- Bottom Line
What Factors Do Lenders Consider When Making a Personal Loan Decision?
When lenders process new loan requests, they try to figure out whether you will repay the money back. This way, they use the following characteristics:
Your credit score is a three-digit value that demonstrates your creditworthiness. Credit scores consist of several components, such as your payment history, credit utilization, credit mix, and length of your credit history. If you have a long and strong credit history, a lender considers that you carry less risk to it. Thus, you’re more likely to get approved for a loan. Learn more about what credit score you start with.
Gross Monthly Income
A lender wants to see you have a steady income as it’s a kind of guarantee that you’ll be able to repay a borrowed amount. However, it doesn’t have to be a traditional paycheck. It may be any other form of income that you can document.
Your debt-to-income ratio shows a correlation between your total monthly debt payments and your gross monthly income. A high ratio indicates a high financial burden. This way, a lender may find you risky and reject your loan application.
Is It Possible to Get a Loan When You’re Unemployed?
As we’ve already mentioned, lenders always consider an applicant’s income when processing loan requests. However, you can get a personal loan even if you’re not officially employed or after bankruptcy. The issue is that not all lenders are willing to give loans to those who don’t have a traditional job. You should get ready for a more challenging process and worse loan terms.
When it comes to personal loans for the unemployed, online lenders are usually the first option that comes to mind. Unlike traditional financial institutions, innovative lenders usually have more relaxed requirements. They can also be a great solution if you have a bad credit score.
Types of Loans Available for Unemployed
Here are a few personal loan options that offer relatively high approval rates for the unemployed.
A secured loan allows you to borrow against your property, such as a car or a house in case of home equity loans or mortgages. As you provide a repayment guarantee that can be seized in case of default, lenders are more indulgent, even if you’re unemployed or have bad credit. However, you should have a clear repayment plan so as not to lose your property.
A payday loan can be a practical solution if you need a small amount to make it to your next pay date. Payday loans are high-interest, unsecured loans, meaning that you don’t need to pledge your belongings. Payday lenders don’t make hard credit report checks, so you can borrow money with any credit.
Typically, the maximum payday loan amount is limited to $1,000, with the repayment terms ranging between 14 and 31 days. The repayment is made in one lump sum.
An installment loan is a type of borrowing that you can repay in parts within 2 to 24 months. Monthly payments are typically equal and fixed. A loan amount you can get depends on your income and can be up to $5,000. Installment loans can be a good option if you’re looking for a longer-term and budget-friendly solution. However, keep in mind that the longer the loan terms, the higher your total loan cost.
Credit Card Cash Advances
If you have a valid credit card, you can withdraw money from its balance within your credit limit. This means that you borrow money against your credit line.
You can either repay the borrowed amount in full or carry it to the next pay period. This way, you need to make only a minimum payment. But note that an interest rate accrues from the moment you wake a withdrawal and is charged daily. Thus, you need to repay the money as soon as possible to avoid high total costs.
How to Qualify for a Personal Loan If You’re Unemployed?
It’s not mandatory to receive your income from an employer to get a loan. Here are the types of earnings you can use to qualify for a loan for the unemployed:
- Pension or retirement income;
- Unemployment benefits;
- Child support;
- Social Security payments;
- Rental income;
- Disability payments.
Additionally, you must meet other specific lender’s requirements, such as being of legal age, having a valid bank account, having proof of citizenship, and more. If you’re going to get a secured loan, you should also provide collateral. Some supporting documents, for example, an appraisal report, may be required too.
Risks of Getting a Personal Loan While Unemployed
Each loan has its drawbacks and risks that you need to consider before taking one out. Here are some of the potential risks associated with loans for unemployed people:
- High interest rates. As lenders want to offset the risk of losing money, they set higher interest rates for risky borrowers. People without a traditional job often belong to this category;
- Defaults. If your income is low, it may be hard for you to fulfill your debt payment obligations. This can result in high late fees and a credit score drop. Make sure your loan payments fit your budget before going into debt;
- Limited repayment terms. Some loan options available for the unemployed come with limited loan terms. This can make it difficult for a borrower to repay the money on time.
How to Get a Personal Loan While Unemployed?
Here are some tips on how to improve your chances of getting a loan when you’re unemployed.
Know the Amount You Need to Borrow
Determining the right amount is the key to success. Make sure not to borrow more than you need just in case, and always have a clear loan purpose. You can also turn to a personal loan calculator to figure out what your monthly payments will be. This will help you choose a suitable loan amount and terms.
Keep Track of Your Credit Score
Your credit score affects your loan terms. Low credit scores can also be a reason for denial. Make sure to pay your bills on time and avoid late loan payments to maintain strong credit. Additionally, you can check your credit report for mistakes. If detected, fix them by contacting a credit bureau.
Compare Offers from Multiple Lenders
Loan options can differ from lender to lender. Don’t rush for the first offer you get. Compare several loans, their interest rates, repayment terms, and additional fees applied.
Personal Loan Alternatives for Unemployed
People who find personal loans unsuitable can consider the following alternatives:
Credit card debt is very common among Americans, and there is a reason for it. If you need a loan that you can use occasionally, you can apply for a credit card and use it as needed. There are also secured credit cards that have more lenient eligibility criteria but require a security deposit.
Home Equity Line of Credit (HELOC)
If you’re a homeowner, you can use your home equity as a repayment guarantee. HELOCs work similarly to regular credit cards, with a credit line that you can use when needed. However, they are secured by the equity you have in your home. This means that a lender can repossess if you fail to repay the loan.
If you have a retirement savings account, consider withdrawing money from it. Although you give up the interest you can earn from the borrowed amount, such loans have low costs. The interest you pay goes into the same savings account. However, 401(k) loans typically take nearly 2 weeks to get.
Remember that you can always turn to your loved ones when financial difficulties happen. Although it may be awkward, it can help you save money on interest. Just have a clear repayment plan to avoid the relationship deteriorating.
Getting a personal loan can be a great solution if you desperately need money while unemployed. There are several options people without a traditional job can consider. However, each of them requires proof of income an individual gets from the government or other sources. Also, you can consider a few alternatives. They can work if a personal loan seems not for you or you’re not sure you will be able to repay it.
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Written byKerry Vetter
Written byKerry Vetter
Kerry is a finance expert thanks to her Boston College education during the 1990s. Today she shares this valuable knowledge through the pen and online from her home in Chestnut Hill, Massachusetts. The years of experience results in relevant, practical and wise advice.