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It is possible to get a personal loan without a job because some lenders use the non-employment income for appraisal and, in some cases, allow you to take a loan with no income.
The chances of approval depend on the lender and your overall financial position. Most lenders consider other sources of income, retirement and bank accounts, alimony, disability payments, and more.
How Lenders Determine If You're Qualify for a Personal Loan If You Unemployed
Personal loan requirements vary by lender. However, there are common requirements that financial institutions look at when evaluating personal loan applications.
Here are the factors lenders consider to assess your credit risk and ability to repay the loan.
Lenders evaluate your credit history to see how you manage previous and current debt obligations.
Several missed or late payments are a red flag to lenders.
Also, lenders may be reluctant to approve your loan if you do not have an established credit history.
The credit score rates your creditworthiness or the likelihood that you will repay your debts. It is based on your payment record, the amount owed, existing credit accounts, and length of credit history.
A high credit score increases the chances of having your loan approved. This is because a higher score is considered good and may result in lower interest repayment.
Conversely, a low credit score shows that you are a risky borrower, which might lower your chances of getting a loan.
Lenders consider borrowers' income before giving loans to ensure they can repay them.
Most lenders require you to show proof of your income using pay stubs, bank statements, and tax returns. A stable income proves to the lender that you can repay your loan and determines the loan amount.
If you do not have a job, you can use other sources of income for a loan. Most lenders accept income from different sources, including:
- Disability payments
- Interest and dividends
- Rental property
- Retirement Account
Your debt-to-income ratio is your total debt payments in a month divided by your gross monthly income expressed as a percentage.
For example, if the total of your debt payments in a month is $2,000 and your gross monthly income is $5,000, your debt-to-income ratio is 40%.
Lenders use the ratio to predict your ability to repay new or existing debts or take on additional debt. If your DTI ratio is high, it shows that you are a risky borrower.
On the contrary, a low DTI ratio shows that you are a less risky borrower and are preferred by most lenders. Different lenders and loan products have different DTI ratio limits.
Which Documents Should You Prepare If You're Unemployed?
To get approval for a personal loan, you must provide certain documents to your lender. The lender reviews the documents to check and confirm your personal and financial information before giving a loan.
Although every lender has unique eligibility and application requirements, most look for the same documents. Having the required documents prepares you for the application process and increases your chances of approval.
The documents that your lender may require vary based on whether you are employed and whether the personal loan is secured or unsecured.
If you are unemployed, the documents that you should prepare when applying for a personal loan include the following:
- Bank statements
- Income tax returns
- Form 1099-S
- Proof of individual retirement account
Preparing the documents before applying for a personal loan helps save time and lowers the chance of experiencing delays in the loan processing and disbursement processes.
The Risks of Getting a Loan When You Don't Have a Job
Taking a loan is a serious financial undertaking that requires serious deliberations. It would help if you had a realistic plan of how to repay your loan because late payments can lead to serious financial harm.
When you do not have a job, there is a high possibility of missed or late loan repayments. Therefore, you need to be creative to make timely loan repayments. For example, you may need to sell some items in your house to repay your loan.
Even though you may get a loan while unemployed, there are risks that come with it, including:
- Low Credit Score: You adversely damage your credit score when you default or fail to repay your loan. A low credit score lowers your chances of qualifying for another loan in the future and increases your cost of borrowing.
- Lower Loan Amount: When you do not have a job, the lack of steady income will make you qualify for a lower amount than you would be eligible for if you had a job.
- Higher rates and Fees: When you fail to make prompt loan repayments, you may pay more in interest. Also, you may pay higher origination fees because the lender perceives you as a risky borrower.
The higher fees and interests compensate for letting a high-risk borrower borrow money. As a result, the high-interest rates increase your cost of borrowing, and the high origination fees lower your loan amount.
In this chart compiled with LendingTree customer data, you can see that those with a 720+ credit score pay an average of 7.63%. At the other end of the scale, for those with a poor credit rating of less than 560, the rate shoots up to an eye-watering 113%.
How to Improve Chances of Getting a Personal Loan if You Don't Have a Job?
Getting a personal loan is more challenging when you are unemployed.
Most lenders give loans to borrowers because they believe you can pay back their funds. However, when you are unemployed, no money is coming in regularly, and the situation might be challenging.
Given that every borrower's financial situation is unique, there is no single formula to qualify for a personal loan. However, there are tips that you can use to improve your chances of getting a personal loan if you are unemployed, including:
- Maintaining a High Credit Score: Maintaining a credit score of at least 670 improves your chances of qualifying for a personal loan. You can maintain a high credit score by paying your credit cards and other loans on time.
- Consistent Monthly Income: The minimum income requirements among lenders vary, and some have no requirements. However, it is important to have a steady source of income to prove to the lender that you can make prompt monthly payments.
- Low Debt-to-Income Ratio: Some lenders approve personal loans for qualified borrowers with a DTI ratio of 50%. However, you can increase your chances of qualifying for a personal loan by aiming for a DTI of less than 36%.
- Apply With a Co-Applicant: When your co-applicant has a higher credit score than you, your loan can get approved for a lower interest rate. Also, the co-applicant can be helpful if you do not have a good credit history and a steady income.
How to Get a Personal Loan While Unemployed?
When you apply for a loan, the lender looks at your credit score, existing loans, and income.
Below are the steps to get a personal loan when you are unemployed.
1. Understand Your Loan Options
It would be best to familiarize yourself with your loan options because there are many loan types for unemployed borrowers. Most of the loans that you will run into are expensive.
Therefore, exploring your financial situation and separating expensive and affordable loan options is important.
2. Document Your Income
As an unemployed borrower, any income you receive can help you qualify for a personal loan.
You need to provide documentation for any retirement, dividends, or alimony because lenders might consider them. Documenting the different incomes could be the difference between qualifying and not qualifying for the loan.
3. Document Your Assets
If you do not have a job and don't have a source of income to qualify for a personal loan, you may qualify for a secured loan based on your assets.
A lender might consider different assets, including:
4. Decide the Amount You Want to Borrow
After evaluating your loan options, income, and assets, you need to decide the amount you want to borrow.
It would be best to decide on an amount you can comfortably repay.
5. Choose a Favorable Lender
Most lenders will treat you as a risky borrower based on your employment status and charge high-interest rates.
After checking with your bank and other online lenders, you need to choose a favorable lender. You can use lender prequalification to identify lenders providing competitive rates and avoid predatory ones who are out to exploit your situation.
Then it's time to apply. Provide all documents and other info needed in the application process. An approval can take between hours to a couple of days.
Personal Loan Alternatives
If you do not qualify for a personal loan or decide that it is not the right choice for you, there are other loan options that you can explore and use to get the money.
Below are the alternatives that you can consider.
You can take a HELOC or home equity loan if you have enough home equity.
- For home equity loans, the lender gives you a lump sum payment, and you repay in fixed installments.
- On the other hand, when you get a HELOC, the borrowing is as-needed, and you pay interest on the money you borrow.
It would be best to be cautious before taking home equity and HELOC loans because failure to repay them can lead to foreclosure on your home.
If you have a certificate of deposit (CD) account, you can take a loan backed by the funds in the CD. The interest rate is lower because it is a secured loan.
However, you can only get a loan equal to or less than the amount in your CD account. Failure to repay the loan can lead to the seizure of the funds in your CD account.
Credit cards are not the ultimate alternative for personal loans, but it's one of the best options you have.
Credit cards can provide you with a line of credit, and many 0% intro APR cards provide 0% interest for a specific period.
However, credit card interest rates are supposed to be higher, and your credit limit is limited. Another drawback id credit utilization – high credit utilization negatively impacts your credit score.
You can get a credit card if you are unemployed. However, similar to personal loans, you may need to provide additional documents.
Most lenders require you to provide documents that prove that you have a stable income and meet the minimum income requirements.
Moreover, most lenders assess your credit history, DTI, credit score and other eligibility requirements before processing a personal loan.
There is no application process when taking a cash advance on your credit card.
As long as your credit card is operational, you can press the cash button on the ATM and take out the amount you want.
The amount you withdraw should be within your daily limit
You can get a loan from your bank, credit union, or online lenders.
However, you will need to research the lenders that offer loans suitable for your situation.
The process is less complicated if you have a source of income or collateral.
There is a good chance that you are eligible for a personal loan if you are working part-time.
However, most lenders require proof that you can make prompt repayments. Moreover, lenders might check your creditworthiness and require proof of other sources of income.
When applying for a loan, most lenders consider different sources of income, including trust proceeds, child support, disability income, and income from family members.
Some lenders consider all types of income, while others do not. Therefore, you can check with your lender before applying for a loan.