Loans for the Unemployed

There are many factors that lenders use in deciding whether to loan you money, how much money to loan, and under what terms to lend it.  Basically they are attempting to ascertain the likelihood of your paying back the loan.  The lower the likelihood is that you will pay them back – based on the evidence available to them – the less likely you are to get the loan, at least on anything other than undesirable terms.

One of the factors lenders are most likely to scrutinize is your income.  They want to know that you will have steady income during the time you’ll be repaying the loan.

This presents an obvious problem if you are unemployed.  Lenders can’t help but be wary of a borrower who’s not bringing in a paycheck.  Why should they believe you’ll have sufficient income to pay them back later if you don’t have a stable income now?

The very fact that you’re unemployed is probably why you need to borrow money in the first place, but it’s a cruel reality that your need is what makes you a bad credit risk.  People who are in great shape financially and aren’t desperate for a loan at all can easily borrow money on good terms.  You, not so much.

That’s not to say that it’s impossible, though, to borrow money when you are unemployed.  Let’s look at a few ways unemployed people do in fact obtain loans.  Perhaps one will apply to your situation.

1.  Student loans

Student loans are not granted on the basis of your current employment status.  Unemployed students who need money for school commonly are able to secure loans.

There are two main reasons for this.  One, the fact that you’re pursuing higher education means you’re likely to have a good income later, when it comes time to pay back the loan.  So your present employment income of zero is not indicative of your future employment income.  Two, student loans sometimes either come directly from the government or are guaranteed by the government.  As a matter of social policy, money is provided to facilitate people obtaining an education even when a coldly rational, market-based, cost-benefit analysis might say not to lend the money.

2.  Home loans with a high down payment

If the reason you’re seeking a loan is you’re trying to buy a home, and you’re concerned that being unemployed will make you a high risk for a mortgage, you can sometimes get a “no income verification” or “stated income” loan.  What this means is you can pretty much state whatever you want as your present and projected future income when applying for the loan, and it will be accepted.

Why would this be allowed?  Because the other terms of the loan are adjusted accordingly.  When lenders can verify you have a steady income, they can loan to you under more favorable terms.  When they just take your word for it, they know there’s a good chance it isn’t really so, therefore they are not comfortable lending to you under those favorable terms.

One difference can be in the down payment.  If you are able to put down 25% or 30% or 40%, then they might be willing to treat you like the person with the verified income who only makes a down payment of half that amount.  By putting down so much, your equity in the house is that much greater from the start.  That means they are a lot more likely to be able to recoup their loan through a foreclosure if necessary, which can offset their concerns about not having verified your income.

3.  Personal loans when unemployment is temporary

As stated, the reason your unemployment makes you a credit risk is a lender has to wonder how a person with no income now will have enough income later to pay back the loan.  You may be able to overcome this concern if you can provide good evidence that your circumstances are unusual in that your present unemployment is not indicative of future income problems.

For example, what if you are a seasonal worker, temporarily laid off?  You really aren’t such a bad risk if you can approach a lender and make a case like the following:  “I’ve been employed in this industry for fifteen years.  Each year there is no work for two to three months, and the workers are laid off and collect unemployment.  We can sometimes come up short during that temporary period since the unemployment checks are less than our paychecks, so we need a loan to tide us over.  Then we pay it back when our employment resumes.  As you can see from my credit report, our needing to borrow like this during these temporary periods I’m unemployed each year has never caused me to default on a loan.”

Or what if you voluntarily left a well-paying job to devote yourself full time to training for an even better paying job?  Again, you would have to provide evidence to convince a lender that people in your position are good risks, that your unemployment is temporary.  Much like the person obtaining a student loan, what you have going for you is that you’re getting an education that will actually make you better able to pay off a loan than if you simply got the best job you could get now at your present level of ability.

4.  Credit card cash advances

The credit card companies who have extended you credit in effect have already approved you for loans, up to certain amounts.  You don’t have to approach them anew as an unemployed person and worry how your employment status will look to them.  You’re already over that hurdle.  If you have a cash advance limit on a given card of $5,000, then that $5,000 is available to you regardless of the fact that you were laid off last week.

Obviously your employment status hurts you in obtaining new cards, or bumping up your limits on existing cards, but for your existing limits on existing cards, it’s irrelevant.

Be careful, and be strategic, though, if you choose this option to borrow money.  Understand that the terms for cash advances are often unfavorable – high interest rates, fees, etc.  For example, if you take a $5,000 cash advance off a given card, you might be assessed a 3% fee off the top, which is $150, plus have to pay an annual interest rate of 19.9% instead of the 12.9% you pay for purchases.

So look for opportunities to mitigate the damage.  If you need to make purchases and pay bills of $2,000 this month and you don’t have the money, it’s almost always better to charge them as purchases on your card than to take a cash advance for that amount from your card and use that money.

Keep your eye open for promotional deals from your credit card companies that make cash advances less disadvantageous than usual.  For many years I had a credit card that routinely had promotions for cash advances with no interest for the first six months, and an upfront fee that was capped at $50.  That was so good it wasn’t just the kind of thing to fall back on as a last resort, but an actual way to make money.  You could borrow thousands or tens of thousands of dollars for $50 and no interest, stick it in a savings account or something that generates an income, and pay it back in six months and keep the profit.

Shift credit card debt around if it’s advantageous to do so.  For instance, let’s say you are unable to get a decent interest rate for your cash advance and so must borrow at 18.9%.  Just because that was the best rate on any of your cards for cash advances doesn’t mean it’s the best rate for balance transfers.  Perhaps you have another card that charges 19.9% for cash advances but 3.9% for transfers.  So take the cash advance off the first card, then before the first bill, transfer the balance to the second card.

5.  Loans based on collateral

If you own a home, own a car, have items you can pawn, etc., then these, rather than your current and projected future income, can provide the assurance to lenders that they’ll be paid back.

6.  Family loans

It generally means swallowing your pride, but sometimes the least of the available evils when you’re unemployed is to approach a family member or friend for a loan.  They too will be wary of your lack of income, but your emotional ties may make them willing to lend money to you in spite of this.

It’s recommended that even if you borrow from someone in your personal life like this, you don’t make it too “informal.”  Discuss and agree to the precise terms of the loan – the amount, interest rate if any, when it will be paid back, the consequences of not paying it back, what collateral if any is involved, etc. – and commit it to writing.  This can avoid some major headaches based on misunderstandings later.

7.  Government loan

If you talk to your local cash assistance or unemployment insurance government office, you can sometimes obtain a small loan as a form of advance on future benefits.  So if you’re eligible to receive a certain amount in unemployment compensation or other benefits over the course of the next few weeks or months, and you can establish that in your present circumstances it would make a huge difference to get some of that a little quicker (e.g., your home is about to be foreclosed), they may be willing to work with you.

8.  Legal loan sharks

There are many, many businesses nowadays that specialize in “payday loans,” “check cashing,” “lawsuit loans,” “structured settlement loans,” etc. that have found loopholes in the usury laws to take advantage of the most desperate people with outlandish interest rates that can total 100% or 200% or more annually.  Morally if not legally they are on the level of loan sharks if not worse.

But, they exist, and they’ll loan to virtually anyone.  If you are unemployed and have absolutely no other possible alternative, if you’re looking for a last resort short of robbing a bank or starving to death, understand that you may well be able to borrow the money you need—at horrible terms—from one of these establishments.

So there are options out there if you need a loan while unemployed.  They generally aren’t the most desirable of loans, but they can tide you over while you work on getting that next job.