The COVID-19 pandemic didn’t just affect the health and well-being of everyone–its economic effects are drastic and currently persist. Many businesses have gone under some downsized, causing a mass paradigm shift and a rise in the unemployment rate.
Unemployment can be stressful, and expenses continue even without a source of income. Individuals may want to consider getting a personal loan to get financial relief or require an emergency loan to address a predicament. But is the option even available without a job?
The good news is you CAN get a loan while unemployed. Read on to find out what kind of personal loans you can get and everything you have to consider before approaching financial institutions.
Things to Consider Before You Take Out a Personal Loan While Unemployed
People who are unemployed can certainly qualify for a personal loan. It is worth considering for someone in a monetary bind. Before getting a personal loan while unemployed, however, borrowers have to carefully consider a few things before making an application. Find out more about what is a benefit of obtaining a personal loan?
Taking out any type of loan has potential risks and consequences that one must always keep in mind, but someone unemployed may need to be even more careful. With that in mind, here are a few things that you need to answer with great forethought before taking out a personal loan.
Can You Follow Repayment Terms?
Before you get loans, you should ensure your ability to make on-time payments. Late payments are generally something to avoid, as they will very often come with late payment fees that are usually a percentage of the payment due.
Late payments will also affect your credit score, which can affect your ability to get loans in the future. While your credit score can be made better, you won’t be able to do that fast enough to get emergency loans.
Worst of all is not being able to pay back the loan. Lenders might be able to start debt collection, may file negative information on your credit report causing even poorer rating, file a lawsuit, and in the case of a loan that requires collateral, having your property repossessed.
Do You Understand The Loan Terms?
It’s important to thoroughly review any sort of contract, no matter what kind of transaction it is. Make sure that the terms are secure for your end, and you aren’t signing something that will compromise your assets beyond what has been agreed upon.
It’s no different when it comes to personal loans. Be mindful of the loan terms and make sure you understand them completely, including the interest rates, repayment, loan tenure, penalties, and more. If need be, ask your lender to simply the terminology of the loan contract so you can better understand it.
Are You Aware of The Risks?
Borrowing money is undoubtedly risky, especially when you’re unemployed, because that would mean you currently would not have a source of employment income. It’s important to make yourself aware of the risk before moving forward with personal finance.
When shopping for a personal loan, consider the best- and worst-case scenarios to determine if financing is worth the risk. Here are a few questions you have to ask yourself:
- Is a personal loan the best option, or should I opt for something else for emergency cash?
- Will I have a source of income by the time payments begin?
- What happens if I can’t make payments?
- What should I do if I can’t make payments?
- Will this potentially get my property (car or home) taken away by the lender?
- How much will the cost of the loan be once I repay it?
It’s worth factoring in these questions and risks and preparing contingencies in case of the worst-case scenario. It’s also ideal to reach out to an expert on finances to better understand what you’re getting into.
Guide to Getting Loans While Unemployed
It’s time to consider what to do when approaching lenders as someone unemployed. While income requirements are commonplace when applying for a loan, it isn’t the only thing that lenders look at, and some lenders may be more lenient than others.
For instance, a good credit score, payment history, and debt-to-income ratio may come into play when it comes to evaluation. At the end of the day, it will depend on the lender.
Common Factors Considered by Lenders
Each lender has different standards for loan approval and different credit policies to determine whether someone has the ability or the willingness to make payments for their loan. This is also known as credit risk.
As mentioned earlier, lenders might include credit history, credit scores, financial security, DTI ratio, and sometimes even your educational history for most personal loans. Annual income is commonly included, as steady income means more likely to pay for a loan.
Your case will be different. As someone unemployed, what do you need? Do you need to have traditional income paid for by an employer to get approved for a personal loan? What counts as income anyway?
What Counts as Income?
When submitting a loan application as someone without a job, lenders might still require proof of income. “But I’m unemployed,” you say? It doesn’t actually have to come from an employer! Steady income can come in different forms.
According to the IRS, there are quite a few sources of money that can be considered income. These include:
- Unemployment benefits. The U.S. has certain programs that provide unemployment benefits through insurance programs.
- Interest and dividends. You may be earning from interest from a savings account or from investments.
- Social Security payments. The money you get from social security also can count as income.
- Pensions or annuities. Pensioners and other benefits can register them as income.
- Alimony. Money gained from marital separation can also count.
- Certain disability payments. People with disabilities can use their benefits as income when it comes to applications.
- Child support. Money gained from child support may also be considered.
Types of Personal Loans for Unemployed Borrowers
As an unemployed person, be wary as some types of credit may not be ideal. Take a look at your different personal loan options and consider the risks that may come with each of them.
1. Secured Loans & Unsecured Loans
These are your traditional personal loans. A secured personal loan requires an asset as collateral, usually the borrower’s house or car. An unsecured personal loan is collateral-free.
Unsecured loans may be more ideal for borrowers, but keep in mind that lenders typically consider them to be riskier, possibly resulting in a smaller loan amount and a higher interest rate. Make sure to consider the terms and not be sold on the lack of collateral alone for unsecured loans. Find out more about small personal loans.
A secured loan, in comparison, might be riskier for borrowers. Being unable to pay may cause your property to be taken by the lender, so it’s best to keep that in mind.
2. Payday Loans
A payday loan is a short-term credit option that, as its name suggests, is expected to be paid on your next payday. It can be approved and disbursed quickly, so it is good as an emergency loan, and borrowing doesn’t require good credit.
Because of that, payday loans won’t affect your credit profile when you repay, and they can cost a remarkable amount with their usual high interest rates, which leads to them being illegal in some states.
Some states continue to offer them, and while terms and structures may vary between each lender, state, and loan, make sure you fully understand the terms and risks when considering a payday loan.
3. Debt Consolidation Loans
If you’re struggling to stay on top of all your bills, you might decide to combine—or consolidate—all your debt into one loan payment so you can focus on paying a single bill.
Keep in mind that debt consolidation loans don’t remove your debt, and in some cases, may result in you paying more.
4. Cash Advances
Instead of traditional loans, you have another option as a credit cardholder. If you have a credit card, you may be able to use it as an emergency loan. Some credit cards allow holders to borrow a portion of their credit limit in cash, known as a cash advance.
This is another kind of short-term, high-cost loan. You can use your credit card to withdraw cash from an ATM, but this may be expensive due and may charge you additional fees, too. Cash advances will have higher interest rates on regular credit card purchases.
What to Do if You Don’t Qualify for a Loan
If you end not being able to qualify for a personal loan, here are some things you can do to prepare yourself financially.
1. Consider Your Expenses and Evaluate Your Budget
If you have difficulty with existing credit card debt, bills, and other loans, it’s a good idea to take a look at your budget and cut out nonessential expenses.
2. Get a Co-Signer
A co-signer for a loan will essentially shoulder the financial burden with you, resulting in financial services being more inclined to lend to you due to decreased risk.
3. Evaluate Your Savings and Emergency Funds
Requiring financial relief as someone unemployed is considerably an emergency, so if you’ve got a savings account or emergency fund, it might be time to use it.
It’s still a good idea to consult an expert beforehand, such as for tapping into a retirement fund.
4. Find Alternative Income Sources
It might a good idea to find alternative income outside sources of traditional employment. There are many gig economy job options, from answering surveys to writing and editing articles.
5. Find Alternative Sources of Financial Aid
The U.S. has emergency loans and programs with unemployment benefits that can give people financial assistance. For instance, an unemployed person with limited income may be entitled to a Coronavirus hardship loan.
There are nonprofits that offer assistance to freelancers, service industry workers, and people who need help with medical expenses.
6. Monitor Your Credit Score
It’s important to keep an eye on your credit score and seek out ways to increase it. You may access your score through the credit bureaus that provide credit reports and make sure that you’re keeping it steady if not increasing.
Exploring Other Options
- Contact your current creditors for financial assistance. You can work directly with the lender as some may even be inclined to assist you to get your payments.
- Low-interest credit card. Consider applying for a low-interest credit line for an easy-to-access source of funds.
- Borrow from an investment or retirement account. You may be able to tap into your investments or retirement account, as long as you make sure to keep them secure eventually. Consult an expert before making a decision.
- Family and friends. When all else fails, it might be time to ask for help from your loved ones. You can likely get better terms on a loan from a family member that fits your situation better. You may also ask them to be a co-signer on a loan.
The Bottom Line
- Personal loans are available to people who are unemployed. Lenders have other considerations when it comes to eligibility.
- Even if you can get a loan, it’s important to consider your ability to repay the loan, because it can put you in a deeper financial bind if you don’t.
- If you don’t qualify for a loan, don’t fret–you have other options. Make sure to explore them.
While unemployment is a precarious position to be in, it’s best to carefully consider your options before going applying for a loan. Make sure you understand the risk associated with those options so that you can keep your finances secure.
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