Ever since the advent of COVID-19 Britons have been facing financial hardships due to furloughs, wage cuts, and job losses. These are tough times and we know you’re doing your best to cope up. But not all of us have a financial cushion to fall back on, so not having a job can gravely impact our financial circumstances.
Given the ongoing crisis, you may find yourself needing some extra cash to get through the days. But getting approved for a loan can be tough when the lender knows you’re unemployed.
Unemployment shouldn’t hold you back from securing a loan. While there’s no certainty of you getting a loan, but there are a few options available for people out of jobs. In this article, we’ll learn more about loans for the unemployed and how they work.
Getting a loan if you’re unemployed
Can you get a loan if you’re unemployed? Well, it’s a tough one to answer. It certainly is difficult for an unemployed person to bag a deal with a decent loan term. High street banks and building societies may simply repudiate your application if you’re not a regularly paid employee.
Hence, if you’re unemployed and a benefit claimant, switching jobs, or have not undertaken paid employment, getting a loan on standard terms won’t be easy. Thus, you’ll have to find lenders who specifically cater to such applicants.
What are unemployed loans and how do they work?
Employment and a stream of regular income are two of the many criteria based on which lenders judge an applicant’s profile. So if you’re unemployed, your options will be narrow since some lenders even have a minimum income requirement.
Although there are lenders out there who consider borrowers who are out of jobs, claiming benefits. As long as you can prove your affordability throughout the loan term, they may approve your loan. Now, this income could be the proceeds from the benefits that you’re claiming. Another prerequisite is that the benefits will be guaranteed throughout the loan term.
The application procedure is standard. The eligibility criteria may vary from lender to lender. Before applying, however, you should assess if you satisfy those parameters. Here’s a list of things lenders check your profile for:
- Age: You must be 18 years or above to be eligible to apply for an unemployed loan.
- Residential Status: You must be a legal UK resident, with an active UK bank account.
- Credit History: Lenders might overlook your employment status if you have a solid credit history to back your case. Poor credit history may hamper your chances of getting a loan. Even if you find a lender to approve your loan, the loan terms may not be favorable.
- Income: Even when unemployed, you need a source of income to prove your affordability. This income can be funds generated from benefits or investment payouts. Ensure that they’re mentioned in your loan application.
- Guarantor Requirements: If you are unemployed and seeking a loan, the lender may consider your application if you get a guarantor to co-sign it. Your guarantor will need to have a decent credit history and be a regularly paid employee.
Getting a loan when you have no income
The general notion is that lenders lend money to those who demonstrate creditworthiness and the affordability to repay the loan at the end of the term. So if you cannot show a stream of regular income, your chances of getting a loan are very slim. The better your financial situation is, the likelier it is for you to get a loan at a low-interest rate.
You may find a lender willing to loan you money without the proof of a regular income or a job, but the rates they offer will be exorbitant. So make a wise choice to avoid becoming debt-ridden.
Types of loans available for the unemployed
The following are some types of loans that you may be eligible for if you’re unemployed. But tread cautiously as these loans come at extortionate interest rates on highly unfavorable terms.
- Credit Unions: A Credit union is an FCA regulated financial institution that functions as a cooperative to lend money at significantly low-interest rates. They accumulate a part of their savings and loan it to a member in need. The interest rates of credit unions are as low as 3%, with no hidden fees or penalties on premature repayment of the loan. To secure money from a credit union, however, one must be a member, with some savings pooled in that union.
- Universal Credit: This is a form of credit available to those on a low income or out of jobs to help with their living expenses. The amount you get through universal credit will depend on your earnings. Your circumstances are checked every month, so any improvements will affect the amount of money that you get. You can use the official benefits calculator to see how much you are eligible for.
- Secured Loans: Secured loans are a form of credit wherein you can secure an asset as collateral against the loan. Should you fail to oblige the terms, the lender may repossess and sell your asset to recoup the loss. These loans often come at low-interest rates since the perceived risk for the lender is low. So you may get this loan even with no income if you have an asset (such as your home) to declare as collateral. But you must make timely repayments since you’re at the risk of losing your home.
- Guarantor Loans: A guarantor is a friend or a family member who co-signs the loan agreement with you. A guarantor willingly agrees that the onus of your loan’s repayment falls on them in case of a default. Your guarantor should qualify the lender’s criteria before co-signing the loan agreement. The guarantor must have a decent credit history and a stable income.
Pros and Cons
Every credit option has some risks associated with it. Thus, you must weigh the pros and cons attentively and make an informed financial decision. We’ve listed some merits and demerits of taking out a loan when you’re unemployed, below:
- If you take out a secured loan, you’ll be at peace knowing that you’re paying towards a fixed-rate loan. Knowing what needs to be paid and when will help to stay a step ahead and plan your budget accordingly.
- You may be able to choose the length of your loan term. Longer terms translate to lower monthly repayments. But you may end up paying more towards interest.
- The lender won’t question you on how you use the proceeds from the loan, as opposed to other credit options like credit cards.
- The interest rate on loans for the unemployed will be slightly higher as the perceived risk for the lender is high.
- If you can’t afford to repay the loan, it’ll keep on adding to your debt, further agitating your finances.
- If you miss repayments, you will face penalties. Furthermore, not repaying your loan on time can be detrimental to your credit score.
Regardless of the form of credit you choose, it is imperative that you introspect your affordability. You must come to a conclusion after carefully assessing your financial situation. The last thing an unemployed person wants is a debt trap. Thus, make a decision only after you’re sure that you will be able to repay the loan.
Shop around for loans before accepting an offer. Visit Loan Broker to find your ideal loan to suit your financial needs.