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Borrowing When Unemployed

When you’re in the unemployment line money is obviously tight, and you may be considering applying for a loan to tide things over until you’re back in work. The problem is that many of the larger banks and lenders are not interested in borrowers who do not have a steady income from employment. Fortunately there are solutions out there and lenders are increasingly taking in to account secondary forms of income when making their decisions. There are also an increasing amount of niche lenders who specialise in lending to the unemployed. Being jobless or without a steady wage is therefore no longer the barrier to cash that it once was.

Of course there are many factors that go towards determining your likelihood to be approved for a loan. For example if you have a bad credit because you failed to meet the terms of past loans, you’ve been bankrupt in the past, or have any County Court Judgements (CCJs) on file; you will typically struggle to get a loan from the high-street.

However that doesn’t mean you will be automatically rejected from every lender. It just means the products available to you will be limited and the interest rates may be higher for the loans that are available to you.

Improve Your Credit Rating

One of the primary factors that help the unemployed get a loan is if they have a good credit rating. Obviously if your income is gone it’s difficult to actually get credit and improve your existing rating, however there are still things you can do. For example if you are not currently on the electoral register for your local area, providing your details automatically gives you a little bump. You can also apply for a small short-term loan (like a payday loan) that you can repay in just a few weeks. These are obtainable by those even with bad credit, so successfully repaying a few of these will help improve your score and open you up to the larger loans you might really want.

(Note: Every time you apply for a loan a note will be left on your credit report. Overdoing it can hurt you, so be sure to apply for loans you are likely to get. This is easier if you use one of the many online services that performs a ‘soft search’ and compares different loan products.)

Loans the Unemployed Can Get

The best loans on the market are always reserved for those with large incomes, who are in steady employment, and have great credit scores. However certain lenders will still lend to you if you are unemployed under certain circumstances. The catch is you will likely face higher interest rates.

Do you have a secondary source of income? An increasing number of lenders recognise that stable income does not just come from employment. Perhaps you are on some kind of benefit for long-term illness or disability, are at the age where you have a state or private pension, or are receiving insurance payments such as income protection insurance, life insurance due to a deceased spouse, or similar. If these are regular payments and are of a reasonable amount, you could be treated just as if you were employed.

Do you have assets? Your wealth and financial status is not just defined by your income from work. If you have high value assets such as property and land, vehicles, business related assets, and other valuables, this may lower your risk assessment. You will be even more likely to get approved for a loan if you agree to pledge assets as collateral (i.e. the lender can acquire or force the sale of collateral items to cover the debt).

Do you own your own home? One option for the unemployed, who own their own home or have paid a large portion of the mortgage, is to take out a loan on the equity of the property. This is basically pledging a portion of the property’s value as collateral.

Will somebody vouch for you? If your own standing is poor some lenders will allow you to bring somebody else in to the fold to vouch for you. A co-signer or guarantor is a third party that agree to take on the debt should you fail to repay. You are essentially borrowing their credit rating and income status for yourself. Of course you must be sure that you can indeed make the repayments, because you don’t want to leave a friend or relative on the hook.

Can you borrow from friends and family? There’s a bit of a stigma about borrowing from friends and family, but there’s no reason why you can do so in a formal manner. Drawing up a legally binding contract is not that difficult and you might even want to agree to pay interest.

Why Take Out A Payday Loan?

There are many different loan products on the market to choose from depending on your financial situation and the reason why you’ve decided to borrow money. Payday loans (which are generally issued by smaller lenders not the big banks or other financial giants), are an increasingly popular option. In the UK this type of loan is regulated under the Consumer Credit Act 1974, which requires lenders to have a license from the UK Office of Fair Trading (OFT).

But why take out a payday loan? Here are 7 reasons …

They Buffer Your Paycheque

Payday loans were invented to help borrowers meet their outgoings with a small amount of money, until their next paycheque is issued. This is why they were called payday loans in the first place. In action this means the duration of the loan is typically around two weeks or until the borrowers stated payday. If you are faced with an unforeseen bill or expense, or accidentally went over your monthly budget, a payday loan may just be the solution you need to tide yourself over until your wages come in. It’s almost like an advance on your wages, but from a lender instead of the boss.

Realistic Amounts

Payday lenders only lend small realistic amounts that suit your monthly income, with the average falling between £265 and £270, and the maximum rarely going over £500. As long as you fill out an application properly and are honest about your predicament, you are unlikely to struggle making the repayment because the sums are so small. Only once you have paid off your existing payday loan can you apply for another, and there are no restrictions on the amount of times this can be done. It therefore may be more practical to take out a payday loan every so often, instead of going for a larger traditional loan that you might be unable to pay back.

Short Duration

As mentioned payday loans are only issued for around 2 weeks or until the date of your next paycheque. In most instances the money is deposited directly in to your designated bank account and then the repayment is automatically taken on the agreed upon date, from the same account. Larger loans can be much more stressful because they are outstanding for months and you are required to repay in instalments. What happens if three months in you can no longer meet the obligation? If all you need to do is buffer a few expenses for the month, a payday loan is a hassle free option.

Understandable Costs

With large loans that are repaid in instalments it can be difficult to understand how much you are actually paying on top of the principal (amount borrowed). Payday loans must be repaid in one lump sum, and the cost of this is clearly communicated to you at every stage. As long as you make the repayment on time there’s no need to worry about interest or fees. In the UK the borrower typically pays no more than £25 per £100 borrowed.

Bad Credit? No Problem

Even if you have a bad credit history you may still qualify for a payday loan if you use a company like Emu.co.uk. This is because your ability to make the repayment is based on your current income status. Because lenders do not issue large sums of money, the risk to the lender is much lower than the risk to a bank when you take out a personal loan of a few thousand. So if your credit rating is not the best and you have struggled with debt in the past, a payday loan may actually be one of the few options available to you.

Easy Application

The majority of payday lenders allow you to easily apply online with a simple web form. There’s no need to fill out reams of paperwork, wait in line for a meeting with a bank employee, fax documents, or wait days for approval. In most cases you will know if you have been approved in minutes and could see the cash in your account the very next day!

Improves Your Credit Rating

A lot of people applying for payday loans will have a bad credit rating. The good news is that successfully taking out and repaying this type of loan is an easy way to improve that rating. The loan is only outstanding for a few weeks and the sums are never too high for you to manage, and once everything is completed you will have proven to other lenders that you can meet your obligations. Do this a few times and you will begin to see your score go up. Over time you will also begin to get access to other forms of credit that you may have been rejected for in the beginning.

What Loans are Available if you have a Poor Credit Rating?

If you have a poor credit rating it could mean that you have shown that you have not been careful with money in the past. This means that lenders are wary of giving you any money because they worry that you may not be able to pay it back. This means that you may be limited as to where you can borrow from.

The first thing to do is to obtain a free copy of your credit rating and take a look at it. Check that the information on it is all correct. If there are outstanding payments listed on there that you do not recognise question it and see whether you can get them removed. You may even have outstanding bills you were not aware of that you can clear in order to improve it. Any positive changes you can make will give you a better chance of being able to get access to wider range of loans.

What some people do not realise is that even with a poor credit rating it may be possible to borrow money. However, this is not the case and there may be various forms of borrowing available. Firstly, any advertised loan or form of borrowing could be available although if you have a poor credit rating you could be charged higher interest on it. It can be worth enquiring about a few of these. Ask the lender whether they would theoretically lend to you and if so whether it would be at the advertised interest rate. Without actually applying this will not show up on your credit rating (application refusals can work against you) but you will be able to find out whether that form of borrowing might be available.

There are some lenders that do not do a credit check and so you are able to get a loan even if you have a poor credit rating. Although this sounds like it could be a fantastic solution for those who want a loan, there are quite a few drawbacks and it is worth knowing about them before getting too excited! The payday loans are normally only for a few hundred pounds and so if you want a large sum of money they would not be suitable for you. The loans only last for a few weeks, with the amount borrowed and the interest and fees being repaid as soon as you next get paid. They are also very expensive compared to other types of lending, because of the risk the lenders are taking and so they could end up getting you into more financial difficulty than you were in before. Alternatively it may be possible to use your vehicle as collateral on a loan. This means that if you are unable to pay back the loan then they will be able to take the vehicle and sell it in order to cover the cost of the debt. This is risky as you may lose your vehicle and it is particularly important to be cautious if you use your vehicle for work and therefore if you lose it you could lose your job. You will also need a vehicle which does not already have outstanding loans on it and that has a fairly decent value as the loan will be for a percentage of the total value of the vehicle.

There are not many options for those on a poor credit rating. The options that are there are all really expensive and it can mean that they are difficult to repay because the cost is so high. It is worth thinking really hard before taking out any loan, but these expensive loans are even more risky. If you miss a repayment on them, the fees can rise really high and you could find that you are in a much worse financial situation than you were before you took out the loan. Before taking one out you need to be completely confident that you will be able to pay it back and that you will be self-disciplined enough to make the repayments on time. This is not always easy and you may think you will easily do it but make sure that you are completely sure. Consider how good you have been in the past at paying things on time and whether you think that this will be something that is hard or easy for you. Also calculate the full cost of the loan and decide whether you think that it is really worth it. Having money is great but when you borrow it you will always have to pay for it and you need to consider whether you are really prepared to pay for the privilege of being able to do that. It is a hard decision and one that should be thought about hard before being taken.