If you find yourself unable to make ends meet while unemployed, a personal loan may be a useful tool. However, you’ll need to prove you can pay the loan back, which is why it can be difficult to qualify. While there are obvious benefits to getting the funds you need, there are also drawbacks to consider before applying.
Can I get approved for a personal loan if I’m unemployed?
It can be complicated to get approved for a personal loan if you’re unemployed. But in some cases, it can work.
“While the employment status is a significant factor in assessing a loan application, it is not the sole criteria. Lenders primarily focus on the applicant's ability to repay the loan,” explained Jeff Rose, a certified financial planner and founder of Good Financial Cents. “In some cases, unemployed individuals can still secure a personal loan if they have alternative sources of income such as rental income, investments, or government benefits.”
Other potential ways to increase your odds of approval include adding a qualified cosigner, and going with a secured loan. The latter requires you to put up collateral, which helps reduce the overall risk associated with lending to someone who isn’t currently employed.
Risks when taking out a personal loan while unemployed
Here are some risks to consider when taking out a personal loan if you’re unemployed:
- Missed payments: You may not be able to make every payment if you remain unemployed for the duration of your loan term, leading to negative marks on your credit, which can make it harder to get a loan later on.
- Loss of assets: If you take out a secured loan, defaulting on it could mean losing your collateral.
- Fees: Missing payments can also mean paying a late fee. But riskier applicants, like those who are unemployed, may see higher origination fees, too.
- Higher overall costs: Strong loan applicants tend to be approved for low annual percentage rates (APRs). The APR accounts for the interest rate and any upfront fees, and reflects the total cost of borrowing. Being unemployed may lead to higher APRs, according to Rose. And if you go with a lender that offers payday loans, those costs can be equivalent to APRs in the triple digits.
- Cosigner responsibilities: If you were to stop making payments on a cosigned personal loan, the responsibility would then fall to your cosigner. And any late payments you make could damage their credit as well. Keep this in mind when asking someone to cosign a loan for you.
- Be careful: If you still can’t qualify for a personal loan, it may be tempting to get a payday loan. Payday loans should be avoided if possible — these short-term loans typically must be repaid in two weeks, and may have astronomically high APRs, depending on your state.
Factors lenders consider for approval
Personal loan lenders consider these factors when determining whether to approve you for a loan:
Credit score
Your credit score is one way that lenders can evaluate if you’re likely to repay the loan, based on your credit profile. This includes things like the length of your credit history, your payment history, and how much you owe. For reference, lenders typically give the best rates to borrowers with a FICO score of 670 or higher. The higher your score, the better.
Debt-to-income ratio
Your debt-to-income ratio (DTI) is calculated by dividing your minimum monthly debt payments by your gross monthly income. For example, if you pay $500 a month toward your various existing debts, and earn $5,000 per month before taxes, your DTI would be 10%. Lenders typically want you to have a DTI ratio that’s below 35%, but lower is better.
Payment history
Lenders want to see that you’re the type of person who is likely to repay the loan. So your payment history is another key factor. The fewer times that you’ve missed payments or paid late, the better your chances of qualifying for a loan.
Income
Income is certainly a factor that lenders consider when evaluating applicants, and some lenders will have stated minimum income requirements — but that doesn’t necessarily mean you need a traditional job. The key here is that money is coming in, so other sources of income can also count. (More on this below.)
Learn More: What Are the Requirements for a Personal Loan?
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Other ways to qualify for a personal loan while unemployed
Lenders will consider many factors when reviewing loan applications, which can work in your favor if you’re currently unemployed. Here are a few factors that may help you qualify:
Social Security
If you receive Social Security benefits, that can help show that you’re able to afford the monthly payments associated with a personal loan. However, keep in mind that if you’re receiving Supplemental Security Income (SSI), your personal loan would be counted toward your resource limit if you don’t spend the money within the month you receive the loan.
Unemployment benefits
If you were let go from your job through no fault of your own, then you may be eligible to receive unemployment benefits, which can help showcase your ability to repay the loan. However, your lender may need proof of your unemployment, how long you’ve been unemployed, and how much you get paid in unemployment benefits, among other considerations. Your state unemployment office should be able to get you what you need.
Alimony or child support
If you receive alimony or child support payments, those can also be used on your personal loan application. You will likely have to provide proof of payments — and potentially proof that this income will continue for a certain period of time.
Spouse’s income
If your spouse earns money, you may be able to use their earnings on your loan application. However, keep in mind that they may have to become a co-borrower if you plan on going this route. Not all lenders accept co-borrowers.
Pension or retirement income
Like Social Security benefits, any sort of income you earn as a retired individual, such as a pension, may be used on your application. To access retirement account funds without paying penalties, you generally have to be at least 59 ½ years old.
Keep in mind
If you have retirement accounts, talk to a financial advisor first to determine if it’s a good idea to withdraw funds.
Compare: 401(k) Loan vs. Personal Loan
Recurring interest
If you receive interest payments or dividends from investments like stocks or bonds, you can also use those to show income on your application. If that income isn’t from an asset that decreases over time, you may not even have to prove that the income will continue.
However, it may make more sense to sell some of those assets instead of taking on debt, especially given the risks associated with borrowing while unemployed. It’s always a good idea to talk to a financial professional before making that decision.
Rental income
Income from a rental property can also be included in your personal loan application by providing a Schedule E tax document showing those profits. Depending on your situation and funding needs, though, selling that property may be a better option.
Talking to a financial professional can help you understand your options, and how those might impact your finances and tax obligations.
Royalties
If you’ve created a product that earns royalties, such as music, books, or movies, you can include those as part of your income on your personal loan application. However, you’ll likely need to show proof of these payments, which may be expressed as net profit plus any depreciation, if applicable.
Foster care and adoption subsidies
Foster parents and those who have adopted a child may receive subsidies that are meant to help with the costs of raising a child, and can include monthly payments. These subsidies can also be used on your personal loan application.
FAQ
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