As more people face unemployment, it’s important to fully understand the many financial options available. From unemployment to stimulus checks, there are options out there when it comes to managing money during difficult times.
One option people may consider during unemployment is a personal loan. But one important question is: Can you get a loan without a job?
Personal Loan Basics
While many of us are familiar with mortgages or student loans, personal loans may be less well-known. Like a mortgage or student loan, a personal loan is, at its most simple, when a lending institution pays out a lump sum of money to a borrower, who then pays back the amount owed plus interest over a predetermined period of time.
Unlike a mortgage or student loan, however, a personal loan isn’t tied to a specific expense. In other words, someone might take out a personal loan to cover the cost of paying for a dream wedding, to remodel a kitchen to get rid of that hideous linoleum, or to cover living expenses during a time with low cash flow.
Personal loans can typically vary from $1,000 to $100,000, depending on the lender’s guidelines, the amount a borrower requests, and the borrower’s creditworthiness. While the lender pays out the amount of the loan in one lump fee to the borrower (minus any origination fee), the borrower pays the loan back over time in installments, often between 12 and 60 months.
The two most common types of personal loans are secured and unsecured. Secured personal loans are loans that use something owned by the borrower as collateral. For example, an auto loan uses the car as collateral for the loan. In other words, if the borrower defaults on their car loan, the lender can repossess that new hybrid in order to recoup the cost of the loan.
Personal loans, on the other hand, are unsecured. Unsecured loans do not use collateral. Instead, lenders may look at borrowers’ credit-worthiness to determine the risk in lending to them and determining an interest rate.
The interest rate for these loans might be different for different borrowers depending on their credit-worthiness, but interest rates might range from around 5% to more than 35%. Interest is paid back alongside the principal amount in monthly payments over the life of the loan.
Are There Downsides to Taking Out a Personal Loan While Unemployed?
Taking out a personal loan may seem appealing to someone who is temporarily out of work, because they might be relatively quick to secure and may come with lower interest rates than credit cards. But as with all financial decisions, it is important to understand the pros and cons of taking out a personal loan while unemployed before applying for one of these loans, including the possible downsides.
But can you get a personal loan without a job? It may be more difficult to qualify for this type of loan if you’re out of work.
Lenders might look at a wide variety of factors when determining whether to offer a borrower a loan. Generally, lenders look at things like income, debt-to-income ratio, credit history, and credit score. Lenders use this data to determine how likely it is that the borrower will pay back the loan, because unlike with a secured loan, unsecured personal loans don’t have collateral that the lender can repossess in the case that the borrower stops making payments.
Of course, if a borrower is unemployed, they won’t necessarily have income to show, and their debt-to-income ratio might be much lower than it would be with a stable income. Of course, different lenders have different criteria for lending, and the ultimate decision about who gets a loan is determined by that specific lender.
Additionally, some lenders may offer higher interest rates to unemployed personal loan borrowers because of the additional perceived risks of lending to someone who is unemployed.
And the risk may not just be for lenders. It is important to consider the ability to pay a higher interest rate or make monthly payments when deciding whether to apply for a personal loan during unemployment. For example, if a borrower is struggling to make ends meet, a loan payment could be impossible to pay on top of other expenses.
And defaulting on a personal loan can be even more expensive: Borrowers could face late fees for missed payments and fees if the loan is sent to collections, and they could take a hit to their credit score if they’re not able to make payments.
Because of these risks, it’s important for potential borrowers to carefully consider the risks of taking out a personal loan during unemployment.
Are There Benefits to Taking Out a Personal Loan While Unemployed?
There may be benefits for someone who is unemployed to take out a personal loan. First, they can be more flexible than other types of loans: Borrowers can use the money from a personal loan for almost anything. This might make it an appealing choice for borrowers who may not have their normal income coming in due to unemployment.
A personal loan also may come with lower rates than a credit card, which can be a major benefit when it comes to saving money. Additionally, the fixed term of a personal loan could help borrowers save money over the life of a loan, because unlike with a credit card, you pay a set amount monthly over a set term, which means payments don’t roll over and continue to accrue interest.
Another potential benefit of taking out a personal loan during unemployment could be consolidating other debts. It could help manage other expenses during unemployment. For example, one reason borrowers may choose a personal loan is to consolidate credit card debt. These types of loans are sometimes referred to as debt consolidation loans.
Debt consolidation loans might help save money if the borrower can secure a lower interest rate than they are currently paying on their credit cards. Using a personal loan to pay off credit card debt could save borrowers money during unemployment by simplifying multiple payments and reducing the amount of money they are paying on higher credit card interest every month.
Of course, continuing to use credit cards after obtaining a credit card consolidation loan might be detrimental, as debt would continue to pile up. Though canceling the cards outright can sometimes have a negative affect on credit scores.
Additionally, personal loans may be an option for borrowers who are facing unexpected expenses like medical bills or moving costs. If the current financial situation or a change in jobs has necessitated a move, a personal loan may be a way to pay for those unexpected costs without relying on credit cards.
Choosing a Personal Loan
Borrowers interested in a personal loan might want to consider all the pros and cons before taking one on during unemployment. If a borrower is ready to apply for a personal loan, it may be important to look for one that meets their specific needs. First, it is important to find a lender willing to work with unemployed borrowers. SoFi®️ personal loans, for example, consider applications from borrowers during unemployment.
If a personal loan sounds like it might be the right solution, borrowers may want to do a little bit of preparation beforehand. It’s never a bad idea for a borrower to figure out exactly much they want to borrow in advance. But remember—borrowers should only borrow the amount they need.
Taking a look at the affordability of monthly payments may also help a borrower determine how much to borrow. Additionally, borrowers may wish to pull up their financial documents and take a peek at their current credit score and overall financial health before applying for a personal loan.
With SoFi, the next step in applying is to get pre-qualified. Prequalification with SoFi doesn’t affect your credit score and lets you see what interest rate you may qualify for. While SoFi offers easy online prequalification, it is important to look around and determine which, if any, personal loan is the best for you.
With SoFi, you may qualify for a personal loan for between $5,000 and $100,000 with no origination fees or unexpected costs. Plus, if you take out an unsecured personal loan then lose your job, you may be eligible for forbearance on your payments and assistance finding a new job in the meantime.
Checking Your Rates: To check the rates and terms you may qualify for, SoFi conducts a soft credit pull that will not affect your credit score. A hard credit pull, which may impact your credit score, is required if you apply for a SoFi product after being pre-qualified.
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