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Being unemployed is a stressful situation, and it can be even worse if you also need to get a personal loan while you are out of work. The good news is that it is possible to qualify for a loan even if you are unemployed.
Here’s what you need to know about getting a loan when you’re unemployed, as well as things you can do to increase your chances of getting a loan.
You can use Credible to compare personal loan rates from multiple lenders, all in one place.
Where to get a loan when you are unemployed
If you are unemployed, you can usually find loans from some banks, credit unions, and online lenders. Although lenders look at sources of income when considering borrowers for a loan, this is not the only factor. Some lenders offer secured loans – where you put up collateral for the loan – which may be easier to obtain than unsecured loans.
Don’t overlook other sources of income when applying personal loans from a bank, credit union or online lender. Many will consider sources such as Social Security payments and any income you’ve earned through freelance or side businesses.
It’s important to shop around, compare multiple lenders, and be upfront about your situation. This way, you won’t waste time filling out loan applications that you’re more likely to get turned down for.
Should you take out a payday loan when you’re unemployed?
It can be tempting to apply for a payday loan when you are unemployed, as they offer fast funding and do not require a credit check. But these short-term loans come with extremely high fees – equivalent to triple-digit APRS – and short repayment terms. If you can’t repay the loan when it’s due, you’ll have to keep borrowing more and you’ll accrue fees and penalties that will be added to your loan balance, which can trap you in a cycle of debt.
Even if you are unemployed, you should only consider using payday loans as a last resort.
How to get a loan when you are unemployed
Your ability to obtain a personal loan does not depend solely on your professional status. here is how to get a loan when you are unemployed:
Determine how much you need to borrow
Make sure you don’t borrow more than you actually need so you don’t pay more interest than necessary. It’s important to make sure your monthly payments will fit within your budget. You can use a personal loan calculator to help you determine the amount to borrow and the amount of your monthly payments.
Check your credit
Reviewing your credit report and score will help you determine which lenders are most likely to approve your loan. You can request free copies of your credit report from the three major credit bureaus at AnnualCreditReport.com. Many lenders disclose their credit score requirements up front. Knowing your score ahead of time can help you avoid applying for loans from lenders whose minimum credit score requirements may be out of reach.
Shop around and compare lenders
As you research your personal loan options, compare lenders based on factors such as rates, loan terms, and how much you can borrow. It’s also important to look at each lender’s eligibility criteria to find the ones that work with them. unemployed person.
Apply for the loan
Once you have chosen a lender, you will make a formal loan application. You will need to provide documentation, which typically includes:
- Government-issued ID, such as a driver’s license or passport
- Social Security number
- proof of income
Once you submit your application, lenders will review your credit history and personal information to determine if you qualify. If approved, it may take up to a few business days for your loan funds to be received, depending on the lender and how quickly your bank processes the transaction.
Credible allows you compare personal loan rates without affecting your credit score.
Factors Lenders Consider When Applying for a Loan
Lenders consider several factors once you submit a loan application. They use these factors to determine the likelihood that you will repay your loan on time:
- Credit score — In general, the higher your credit store, the more likely you are to qualify for a loan with a lower interest rate. If you’re unemployed but have a good credit score, you should still qualify for a loan. But if your score is lower, you may not be approved or receive higher interest rate offers.
- Debt-to-income ratio — Lenders look at your debt-to-equity ratio, or DTI, to determine if you have enough income to afford a new loan. To determine your DTI, divide your total monthly debt payments by your gross monthly income. (Note that unemployment benefits are counted as income when looking at your DTI.) If this number is considered too high for lenders, it could indicate that you do not have enough income to pay your expenses and repayment. of your debts.
- Payment history – How you repay existing loans is an indication to lenders of how likely you are to repay a new loan. Moreover, it is one of the main factors considered by credit reporting agencies to determine your credit score.
- Income – Lenders will most likely require proof of stable income when applying for a loan, but this doesn’t always have to come from an employer.
What counts as income?
When you apply for a loan, lenders understand that your income may not come from an employer — everyone’s financial situation is different.
Here are some common sources that lenders count as income:
- Government benefits — Sources include disability benefits, social security and unemployment benefits.
- Heritage — If you recently received money as a beneficiary, you may be able to include this amount in your request.
- Investments — Recurring income from sources such as dividends could show lenders your ability to repay a loan.
- Other income – This can include sources of income such as alimony or child support.
- Pension or retirement income — The money you regularly receive from these sources is generally considered income.
- Rental income – Any money you earn from short-term or long-term leases counts as income.
- Spouse’s income — Some lenders may allow you to use it as a source of income if you are married.
Since taking out a loan when you are unemployed can be riskier for a lender, it is essential that you make sure your personal loan application is rock solid to increase your chances of approval. Here are several ways to improve your chances of getting a loan when you’re unemployed:
- Add a co-signer. Applying to a cosigner, especially one with a high credit rating and employed, will show lenders that someone has the ability to repay the loan. Adding a co-signer can be risky – they will take responsibility for loan repayment if you are unable to do so – so it is important to have a conversation with them about how you plan to repay the loan.
- Request a lower loan amount. In many cases, your loan could be refused if you ask for a large sum of money. Asking for a lower amount instead could lower your risk factor and reassure lenders that you’re more likely to pay it back.
- Apply for a secured personal loan. When you apply for a secured loan, you provide collateral, such as a car or a house. Secured loans are less risky for a lender, so you may have a better chance of being approved. But think carefully before applying: if you are unable to repay your loan, the lender may seize your collateral.
If you’re ready to apply for a personal loan, Credible lets you compare personal loan rates in minutes.
If you’re not interested in getting a personal loan or are having trouble getting one, consider these alternatives if you’re unemployed:
- 0% APR credit card — Depending on your credit score, you might be approved for a credit card that offers 0% APR on purchases and balance transfers for a specified period. Keep in mind that you’ll have to pay off the entire balance when the introductory offer ends or you’ll start earning interest at the card’s regular rate. Also, credit card balance transfers can incur fees, so first determine if they’re worth it. If you don’t qualify for a 0% APR credit card, a regular credit card can be a way to quickly fund your expenses, although you can pay high interest rates.
- Borrow from family or friends — Asking a friend or family member for a loan can have certain advantages, such as not having to pay interest. But be sure to borrow from someone you’re on good terms with. It’s also a good idea to set out the exact terms of the loan in writing so that everyone is on the same page and you minimize any potential strain on the relationship.
- Home Equity Loan or Home Equity Line of Credit (HELOC) — Homeowners might consider one of these financial products, which use the equity in your home as collateral. Since this is a secured form of credit, you risk losing your home if you fail to repay your loan. You will also need to consider any charges, such as application fees or prepayment penalties.
- 401(k) loan — Depending on your 401(k) provider, you may be able to borrow the money you have in this account. But this should be a last resort, as you are exhausting your retirement funds and will no longer increase the amount of money you withdraw. Other consequences include taxes due if you don’t repay the loan on time. Even if you pay it back, you will have lost some of the tax-free growth on those funds.