Most people believe having a job is vital to securing a loan, but this isn’t always true. Lenders may not be particularly concerned with your employment status as long as they see you have the means to repay the loan you’re requesting. When lenders ask you for proof of income as part of your personal loan application, keep in mind that alternate types of income, such as investments or pensions, may be acceptable if you choose to provide it if they meet the lender’s criteria.
Below, we’ll look at how a person might qualify for a loan if they’re unemployed.
When can an unemployed person qualify for a loan?
If a person doesn’t have a traditional form of income, such as full-time employment with regular payroll compensation, but needs extra cash, there are other options, including the following:
- You have a co-applicant for the loan: If a person applies for a loan with a spouse, friend, or family member with verifiable income, they may qualify for a loan. The loan might be approved if the co-applicant’s income meets the lender’s requirements – even if one party is unemployed. One thing to remember is that co-applicants are equally liable to repay the loan.
- You have other income from benefits: Sometimes loan applicants receive social security benefits, retirement benefits or a pension, public assistance, or even VA benefits. Adults who receive payouts from a trust may also list this as income when applying for a loan.
- You earn interest or dividends: If a borrower makes enough from recurring interest and dividends, they may be able to list this as their source of income. Property owners who rent their land or homes can also list rental income.
Other types of income include disability income and government annuity payments. You could also include income you receive from child support, alimony, or separate maintenance support, but you are not required to disclose this information on your application.
What other factors impact an unemployed person’s ability to borrow?
- Credit score: Some lenders require borrowers to have a good or excellent credit score. Other lenders offer loans to borrowers with lower credit scores. Typically, a lower credit score translates into a higher interest rate for a loan. An unemployed person wanting to improve their credit score could start by maintaining a good payment history and paying off past debt.
- Debt-to-income ratio (DTI): Lenders arrive at your DTI ratio by dividing your total monthly debt payments by your gross monthly income. Lenders typically look for a DTI of 36% or lower, but some lenders may accept a higher DTI.
The disadvantages of getting a loan while unemployed
Despite being unemployed, an individual’s personal loan application could be approved if an alternative source of income is available or if they are applying with a co-applicant who has a steady income and acceptable credit score. However, in either case, being unemployed may expose and increase the borrower’s risk of taking on debt that could become unmanageable.
- The lender may not offer the terms you want: A lender may associate greater risk with lending to an unemployed applicant. The lender may offer a loan, but the loan amount could be lower than the applicant requested. The lender may also offer a higher interest rate or Annual Percentage Rate (APR) and/or a shorter loan term, resulting in higher monthly payments, which could be harder to handle.
- Repayment could be tricky: A borrower relying on alternate forms of income may face unexpected problems that may cause them to default on their loan. For instance, during the COVID-19 pandemic, economic strains made it difficult for unemployed tenants to pay their rent to property owners, which negatively affected the landlord’s income.
The Bottom Line
Finding personal loan opportunities when you’re unemployed may be challenging, but it’s not impossible. Depending on your circumstances, it might be possible to secure a personal loan without a stable income source.
The key is to find the right lenders who will consider alternatives to traditional sources of income, such as disability insurance payments or rental income. Another option is to apply with a co-applicant who has income.
In the end, it’s always best to make a sound financial decision and ensure that taking out a new loan is in your best interest with your current situation.
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