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The Covid-19 pandemic has increased the financial pressure on many individuals and families who have lost all or part of their income due to leave or dismissal. But regardless of your employment status, there are certain expenses that you cannot avoid even when times are tough.
You may have decided to take entrepreneurship by the horns, but it turns out that starting a small business costs more than you initially thought. Or maybe an expensive home repair crashed into your lap, and it’s beyond what your emergency fund can handle.
Whatever the reason, a personal loan can be a useful tool when it comes to getting the money you need for expenses that you might not otherwise be able to cover immediately. But just like any other financial product or service, personal loans come with their own set of considerations that potential borrowers should keep in mind.
Select spoke to a financial wellness educator Danetha Doe to break down what you need to know about getting a personal loan if you’re unemployed.
How to apply for a personal loan?
First, you’ll need to figure out how much money you need to borrow, because with a personal loan, you’ll borrow a fixed amount, says Doe.
If you’ve lost your job and are considering taking out a personal loan to cover lost wages, think about how much you actually need to live on. Doe recommends that you multiply your total monthly expenses by the number of months you think it will take to find a new job. In this way, you can apply for a loan taking this total amount into account.
Before you head to a lender, review your credit report to make sure everything looks correct and that you know your credit score. In the event that something on your credit report does not appear correct, you will want to dispute the error before applying for a personal loan.
Knowing your credit score can help you find lenders that you are eligible for. Some lenders like Marcus by Goldman Sachs and LightStream have online tools that you can use to determine if you would qualify for a personal loan without making a full application.
Select also has a comparison tool that allows you to view different loan offers. You’ll need to answer 16 questions, including your annual income, date of birth, and Social Security number so Even Financial can determine the best deals for you. The service is free, secure and does not affect your credit score.
Editorial note: The tool is provided and powered by Even Financial, a search and comparison engine that connects you with third party lenders. Any information you provide is transmitted directly to Even Financial. Select does not have access to any of the data you provide. Select can receive an affiliate commission on partner offers in the Even Financial tool. The commission does not influence the selection in the order of the offers.
Once you are ready to submit your application, you will need to gather all of your documents. “You will need your most recent pay stubs because you will need to fill out information about your net income,” Doe explains. “And if you’ve moved, you’ll need updated address information.”
And while there are a variety of ways to use a personal loan – a wedding, home improvement, debt consolidation, funeral expenses, emergency expense, and more – you will usually need to explain how you will use the loan. money when you submit your application.
In addition to a request, the lender will also perform a credit check or conduct a thorough investigation, which may impact your credit score. The credit check looks at your financial profile, so the lender can compare your debt (ie credit cards, other loans, etc.) to your debt-to-income ratio).
While you don’t need a perfect credit score to get approved for a personal loan, the higher your credit score, the more likely you are to get better loan terms for you. , such as no fees and a lower interest rate. . (Have a bad credit score, Select rounded up a list of the best personal loans for bad credit.)
Can you be licensed if you are unemployed?
It is possible to have a personal loan approved if you are unemployed, says Doe.
“Being unemployed makes the process more difficult. From the lender’s point of view, they want to lend the money to someone they think can repay the funds,” she says. “So if you are in a situation where you don’t have money coming in, it may be difficult for you to pay them off. If you are used to paying off your credit cards and other past debts. time, this will lend itself to your favor. “
Also, keep in mind that income doesn’t always necessarily come from a traditional paycheck. According to IRS, other ways to show earned income may include working in the odd-job economy, money earned from self-employment, the benefits of a union strike, some disability benefits, and combat benefits. not taxable.
And of course, making sure you feel comfortable with the impact that a loan repayment plan could have on your finances is very important. In some circumstances, you may have no choice but to take on more debt until you can improve your situation.
Take the time to think about the impact the monthly loan payments will have on your overall budget. In some cases, the additional financial obligation is worth paying for an emergency, like a car repair so you can get to and from new job interviews. In other cases, taking on more debt may not be the best decision.
Can you get approved if you have inconsistent income?
If you’re a freelance writer, odd-job economy worker, or self-employed person, chances are you’ve experienced (or continue to experience) spells of irregular income. Either way, you can still get approved for a personal loan. It can help if you are able to prove that you have been in business for at least two years. Otherwise, the lender may ask you to get a co-signer for the loan.
If a personal loan doesn’t sound like something that would be right for you, you still have other options to cover the expenses. You may want to consider a personal line of credit instead. It’s similar to a loan, but it allows you to borrow the money, repay the amount, and then borrow again for a set period of time.
“A personal line of credit can be used when you don’t know exactly how much money you’ll need, but you know you’ll need a tampon,” Doe says. “If an unemployed person doesn’t know how long it will take them to start earning an income again, then a personal line of credit may be a better choice because they don’t know how much they will need. “
Also, keep in mind that personal lines of credit can earn interest and you’ll have to pay these fees as well.
Even if you feel like your options are limited when you’re unemployed and in need of cash, be on the lookout for predatory lenders like payday loans. They carry very high interest rates even when you are borrowing only a small amount of money.
Whenever you decide to borrow money, take the time to read the fine print and understand the repayment terms, so you don’t get caught off guard by additional charges.
Personal loans can be a valuable tool for anyone who needs money to cover an expense. And while you can still be approved for a personal loan if you’re unemployed or have irregular income, it can be more difficult (but not impossible) to prove that you’ll be able to repay the funds. You should always analyze your personal situation to make sure that any new debt or other financial decision is the best step for you.
Editorial note: Any opinions, analysis, criticism or recommendations expressed in this article are the sole responsibility of the editorial staff of Select and have not been reviewed, endorsed or otherwise approved by any third party.