Unemployment benefits can sometimes fall short. Taking a personal loan to cover expenses can lead to several unexpected consequences.
Getting a personal loan can be an attractive option for people who are unemployed. However, you will have to prove that you have an alternate source of income and that your credit profile is strong enough to get approved for a loan.
You also want to ensure you can repay the loan, on schedule and on time every month. Using a personal loan irresponsibly can damage your credit score and leave you with fewer credit options in the future.
When you apply for a loan, lenders analyze many factors to determine if you can afford to pay off the loans. Some of the factors include:
When applying for a loan, you must provide proof of income with past tax returns, bank statements and paychecks. A steady income usually indicates you’ll repay your loans. Your income also helps determine the amount of money that you can borrow.
If you're unemployed and still have alternate sources of income, you may be able to borrow a loan. Some of the alternative income sources that a lender accepts are:
Your debt-to-income-ratio, also known as DTI, is a key metric used by lenders to determine if you can take on more debt. If your ratio is too high, it could be an indicator that you’re already carrying too much debt. Most lenders prefer your DTI to be 36% or lower.
If you’re unemployed, and you carry a lot of debt, your DTI may be too high to qualify for a loan.
Your credit history is used to evaluate how you might manage your future debts. Lenders look at your payment history on your past debts along with other important information, such as bankruptcy or any accounts in collection. If there are missed or late payments on your account, this could be a red flag.
If you’re unemployed with a poor credit history, you might have a tough time securing a personal loan.
Payday loans are rarely a good idea. While they might be easier to get, the interest rates are typically sky high, with significant penalties for late or missed payments.
Payday lenders have been under increased scrutiny for burying or hiding the terms of their loans. They’re very good at appealing to people in need, but they often offer financial relief without explaining the costs and consequences.
Tips to keep your finances on track.
A healthy credit score can often lead to a lower interest rate on a loan. It’s worth working on your credit before applying for a loan and Bright can help boost almost any credit report.
With a personal Bright Plan, we’ll use our patented MoneyScience™ to study your finances, learn about your debt and make smart credit card payments, always on time and optimized to save you money and improve your credit score automatically.
If you don’t have it yet, download the Bright app from the App Store or Google Play. Connect your bank accounts and credit cards, set a few goals and let Bright get to work.
With a postgraduate degree in commerce from The University of Sydney, Pranay has his finger on the pulse of the finance industry. Breaking down complex financial concepts is his forte.