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How to Get a Personal Loan When You're Unemployed

Lyle Daly, The Motley Fool

Getting a personal loan when you're out of work is tricky, but it's not impossible.

Magnifying glass looking at employment section of newspaper.

Image source: Getty Images.

Unemployment can put you into one of those Catch-22 situations. It’s the one time you really need to borrow money because you don’t have your regular income anymore, but that lack of income means lenders will be understandably wary about issuing you a loan.

Out of work doesn’t necessarily mean out of luck when it comes to getting a loan, though. It’s still possible to get a personal loan when you’re unemployed, and we’re going to show you how, along with some other financing options you may want to look at.

What lenders look at with personal loan applications

When you apply for a personal loan, there are a few factors that the lender will weigh most heavily to decide whether to approve you and what kind of terms to offer you if they do:

  • Income -- Your current income plays a significant role in how much a lender is willing to loan you, because they want to know that you’ll be able to pay back that amount.

  • Credit -- The lender will pull your credit file to check your credit score, utilization, and your payment history.

  • Debt-to-income ratio -- The lender will look at any regular debt payments you have compared to your income to verify that you can handle your monthly loan payment.

Income is a crucial part of getting a loan, and that could be a problem when you’re unemployed. What you may not have realized is that income from a job isn’t your only option.

Alternate forms of income

To qualify for a personal loan, you’ll need to demonstrate that you have some kind of consistent income. Without that, the lender would consider you a serious risk to default.

So, if you’re trying to get a personal loan while unemployed, you must have alternate income. Some of the most common options people use are:

  • Unemployment benefits -- If you qualify for unemployment, that counts as income.

  • Freelance income -- Any income you make from freelancing or a side gig would qualify.

  • Investment income -- As long as you’re receiving money from your investments on a consistent basis, it’s considered income. For example, dividends from stocks or rental payments from real estate you own would both fit the bill.

Keep in mind that no matter which option you choose, the lender will most likely require income verification.

There is also one way you could potentially get a loan even if you don’t have any current income. If you have a job offer lined up that you can verify, some lenders may accept that as proof of income and issue you a loan you can use to get by until your new job begins.

How to get a personal loan when you’re unemployed

To get a personal loan while unemployed, here’s what you’ll need to do:

1. Figure out your source of income

It’s important to start generating income as soon as possible once you’re unemployed so that you can demonstrate some form of consistent income to the lender when you apply.

That could mean picking up freelance work, or it could be signing up for unemployment benefits right away. You just need to find a way to have money coming in.

2. Protect your credit

You don’t want to do anything that causes your credit score to drop before you apply for a personal loan, as that will affect your approval odds and your interest rate.

To protect your credit, make sure you continue paying all your bills on time. Don’t rack up big balances on any of your credit cards, as that will increase your debt-to-income ratio and make it harder to get a loan.

3. Choose a lender that fits your needs

There are two things to look for when choosing a lender:

  • Credit score requirements -- There are personal loans for bad credit, fair credit, and excellent credit, so you need to know where you stand and find a lender that has minimum requirements you meet.

  • Amounts offered -- Most lenders offer a wide range of amounts depending on how much you need and your ability to repay, but each has its own minimums and maximums.

One easy way to narrow down your options is by using the tool on our personal loans page. Just plug in your credit, ZIP code, the loan purpose, and the amount you need, and we’ll show you lenders that fit the bill.

4. Apply for the loan

Once you’ve selected your lender, you can click “Continue,” fill out a form to get your loan offer, and then apply for the loan.

Other financing options when you’re unemployed

If you don’t have a source of income to get a personal loan on your own, there are other ways to get the money you need.

Get a cosigner on a loan -- When you have a cosigner on your loan application, the lender will check that person’s credit and income. It’s essentially as if the cosigner is the one applying for the loan.

The cosigner is also taking full responsibility for the loan, so people are typically cautious about doing this. Still, if you know someone well enough and you’re confident you can pay back what you borrow, they may be willing to help you out.

Credit cards -- Credit cards generally aren’t what you want to use to carry a balance because of their interest rates. 0% APR credit cards are a notable exception, as they allow you to pay zero interest for as long as the card’s intro period lasts. During that time, you only need to make minimum payments. There are also a few good low-interest credit cards out there that won’t charge you an arm and a leg every month.

If you already have a low-interest credit card or a 0% intro APR card, either one could be a smart way to pay your bills while unemployed. Or, if you have some form of income, you may even be able to qualify for a new card while unemployed.

Use the equity in your home -- With sufficient equity in your home, you could get a home equity loan or line of credit. Your home will be the collateral, which is a double-edged sword.

Since you’re putting your home up as collateral, you risk losing it if you can’t repay what you borrow. The positive side of this is that it also gives your lender much more security, so they can offer you a lower interest rate than you’d qualify for with most other financing options.

What to avoid

Be very careful about the types of loans you consider when you’re unemployed. A quick internet search will reveal quite a few options, some of which won’t even verify your income, but many will be dangerous lenders that you’re better off avoiding.

In particular, you should look out for lenders that will charge you a high interest rate while offering only short-term loans. These lenders are a dime a dozen, and most consumers who borrow from them end up needing to refinance their loans several times.

Keeping yourself afloat while you’re out of work

Unemployment can be a big source of stress for you and your bank account. Fortunately, if you need some extra cash to help you get by, you may be able to get a personal loan. All you need to do is show the lender that you have at least some money coming in.

Once you’re working again and back on your feet, make sure you get started on an emergency fund. Having money saved in case of a job loss can make all the difference in how hard unemployment is on you.

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