Can I get a personal loan if I’m unemployed?

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In a Nutshell

If you don’t have a job, getting approved for a personal loan can be tough — you’ll likely need to show that you’ll be able to repay the loan through other means. Before you try, though, think hard about whether a loan is the right solution for your situation.

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Unemployment can hit your finances hard and a personal loan may look like an attractive option to help you stay afloat.

Loans for the unemployed are possible, but you’ll likely have to prove that you have an alternative source of income — and the lender may take a closer look at your creditworthiness.

Here are some things to know about applying for a loan if you’re unemployed, along with some info and alternatives to consider before you apply.


Factors lenders may use to evaluate your loan application

Lenders look at multiple factors when evaluating a new loan application. Ultimately, they’re trying to figure out how likely you are to repay your loan.

Income

Income is usually a big consideration in the world of lending, which is why being unemployed can make getting a personal loan more challenging. But if you have income sources outside of a traditional job, you still might have a chance to qualify. Here are some common examples of alternative income.

  • Spouse’s income: If you’re married and the lender allows it, you may be able to include your spouse’s income on your loan application. This may be allowed if you can use that income to help repay the loan. You may need to include your spouse as a co-applicant if you choose to include their income as a source of income.
  • Investments: Capital gains or money from investments like real estate could help indicate your ability to repay your loan. One-time capital gains might not be considered, but recurring income from dividends or rental properties may be allowed if the lender approves.
  • Retirement benefits: Social Security benefits or regular 401(k) withdrawals may qualify if you’re retired.
  • Other payments: Unemployment, alimony and child support may be accepted as other predictable sources of income.

But heads up: The Equal Credit Opportunity Act prevents lenders from requiring you to disclose certain types of income, including types of public assistance, alimony and child support.

Debt-to-income ratio

Another factor that lenders may consider in determining whether you have the ability to repay a loan is your debt-to-income ratio. This is calculated by dividing your total monthly debt payments by your gross monthly income. Your gross income is generally your income before payroll deductions like taxes and insurance.

If your debt-to-income ratio is too high, a lender may use this as an indication that you may not have enough income to pay both your debts and day-to-day expenses.

Credit history

Your credit is also key for lenders in evaluating whether to give you an unsecured personal loan. Lenders will almost surely take a look at your credit scores and could also consider payment history and other information on your credit reports, like past bankruptcies or accounts in collection.

The federal Fair Credit Reporting Act requires consumer reporting agencies maintain fair and accurate information in your file that lenders may consider. While strong credit may not make up entirely for a lack of income, it can weigh on the positive side when you’re trying to get a loan.

Risks of borrowing while unemployed

Taking out a loan comes with risks for both the borrower and the lender if you default.

Let’s look at some of those risks before you borrow while unemployed:

  • Missed payments: One of the obvious worst-case scenarios when you take out a loan without a job is not being able to pay for the loan. Failing to pay back a loan can damage your credit, lead to collections and make an already challenging financial situation even tougher.
  • Higher interest rates: If your income is low, you could still get a loan — but it’s more likely to come with a higher interest rate. Higher interest rates mean higher overall loan costs.
  • Shorter repayment term: If a lender determines that you’re a riskier borrower, you may be limited to loans with shorter repayment periods. That’s because a lender is less likely to believe your financial circumstances will change in the short term.

FAST FACTS

Getting a 401(k) loan

You may be tempted to take a loan out from a 401(k) account to cover your cash crunch, but that can also come with risk and higher cost, especially if you do not repay the loan on time. That can include paying interest, income taxes and a penalty tax unless you meet certain exceptions.

These risks together are a great reason to consider some alternatives to taking out a loan when you’re out of work.

Alternatives to personal loans

  • Credit cards: You may already have a personal loan alternative sitting in your wallet. Some credit cards offer a cash advance as a way to tap into your credit line outside of regular purchases. Just be careful: Credit cards can come with high interest rates depending on your credit history — and cash advances tend to come with their own high rates, too — so it’s best to pay off your balance on time and in full if you use them for short-term needs.
  • Line of credit: A personal line of credit works similarly to a credit card in that you can add to your balance and pay it off multiple times over the life of the account. You make a monthly minimum payment, paying interest on your outstanding balance and possibly a fee for using the credit line. If you can qualify, this may be a reasonable alternative.
  • Secured loan: You could consider using a home or other asset as collateral for a secured loan. Collateral is an asset you pledge to a lender in the event you stop paying for your loan. Interest rates can vary from relatively low to sky-high, so it’s not always an ideal option. And remember, there are also fees associated with these types of loans. The annual percentage rate takes into account the interest rate as well as a range of fees that may be associated with the loan. Also, don’t forget that you risk losing your home, car or other collateral as well as any equity you may have built up in them if you can’t come up with the cash to make timely payments on the loan.
  • Home equity line of credit, or HELOC: This is a line of credit attached to the value of your home. It’s a form of secured credit, meaning your home serves as collateral and you risk losing it if you default on your repayment obligation. Again, remember to look at the APR, which should take into account the interest as well as any mortgage broker fees and other fees. Be sure to confirm whether there are any prepayment penalties, whether the interest rate increases in the case of default and whether there is a balloon payment — a very large payment required at the end of the loan term.

Bottom line

Getting a personal loan while unemployed is often more difficult than getting a loan while you have steady income from a job — but it might still be possible.

With any personal loan, it’s important to be mindful of the costs — and to think through all your options and possible alternatives. Signing up for a loan you can’t afford could make your financial situation even more challenging than it is today.