Can I Get A Loan If I’m Unemployed?

If you’ve been a victim of corporate downsizing, you may be looking for a loan to help you restart your economic engine. Or you may have been in-progress to get a loan before you became unemployed, and now you’re hoping to complete the process.

Whether it’s a business loan to start an entrepreneurial venture, a car loan so you do some driving side hustles, or a credit card to help cover expenses, is getting a loan even a possibility without a job? 

Unfortunately, most lenders want borrowers to have stable W-2 income, so if you’re not working a traditional job, you may find it hard to take out new credit. Here’s what you need to know about taking on new debt when you’re unemployed.

Can You Get A Loan If You’re Unemployed

If you’re asking “Can I Get A Loan If I’m Unemployed?” the answer is usually no. However, it does depend on the loan type, your credit history, and more.

In fact, a better answer to this question is “maybe”. For example, credit cards are usually a yes unless you have adverse credit history. Both personal loans and auto loans may ask for employment, but some lenders don’t. Mortgages will almost always require proof of employment.

And student loans never require employment. Read this guide on how to take out a student loan.

Here are some common loans and whether you can get them while unemployed:

How Banks Figure Out Your Ability To Repay A Loan

When banks issue loans, they look at your credit history, your income, and your assets to figure out if you are likely to repay the loan. Your credit score is extremely important because it shows how you’ve behaved with loans in the past. If you have a high credit score, banks view you as a low credit risk, and are likely offer you the best available interest rates. 

However, banks aren’t only concerned about your history, they care about your future too. Can you repay the loan this time around? Lenders look at your current income and your current assets to figure out whether to issue more credit to you. 

When you become unemployed, it means that your primary income source has dried up. With little money coming in, banks are less eager to loan you money. You’ll need to prove that you have financial assets or the ability to earn money outside of a job to get a loan.

People commonly complain that the only people who can get a loan are the people who don’t need it. And in a way, that’s true. If you have a steady income and always pay your bills on time, you may not need a loan. Yet banks will trip over themselves to lend you money. 

On the other hand, if you have erratic income or have struggled with debt, few banks will lend you money. When you’re unemployed, banks worry that you can’t make regular payments and are unlikely to issue a new loan to you.

What Income Verification Do I Have To Provide?

Lenders have the right to request information about your income and assets and to require certain documents to verify your income. Even if a bank doesn’t ask for verification, you need to answer questions about your income truthfully based on your current circumstances. If you don’t answer truthfully, you could be committing fraud.

Here are some common types of income verification documents by loan type.

• Credit Cards: Credit card applications typically ask about your annual household income. If your spouse is still working, and you worked for part of the year, you can write down your expected income for the year. The key is to be truthful based on realistic expectations. Unless you have a job offer in hand, don’t count on future income from a job. If you’re single, and your only income is from unemployment, then that should be your expected income.
• Personal loans: Personal loans are a form of installment loan that does not require collateral. Lenders typically want to see previous years’ tax returns for self-employed people or two recent pay stubs for traditionally employed people. You’re unlikely to qualify for a personal loan during unemployment. A possible exception to this is the Buy Now, Pay Later installment loan plans such as those offered by Klarna or Afterpay. But payments on those loans start just one month after purchase and can charge high interest and penalties if you miss a payment. Even during unemployment, we don’t recommend these payment plans.
• Car loans: Income documentation requirements vary depending on the lender. Some will want two recent paystubs or two years of tax returns (for self-employed people). Others just ask for a household income number. Whether documentation is required, you must answer questions about employment and income truthfully. Most car lenders want to see a debt-to-income ratio below 36% to issue a loan. If your ratios are too high, you’ll need to increase your income, decrease your monthly expenses, or a combination of both. 
• Mortgages: Mortgage loans come with the most rigorous documentation requirements. You might be approved for a loan with a job offer letter, but your lender will likely want to see a pay stub before the mortgage is issued. If you have a lot of financial assets, you may qualify for a mortgage based on your assets rather than your income. However, your liquid assets (such as money in a brokerage account) must be documented.

How Should I Use Credit While I’m Unemployed?

As mentioned, obtaining new credit when you’re unemployed is difficult. Another thing you’ll need to consider is the best use of your existing credit products when money is tight. Making smart choices now can help you keep your credit and your finances intact. While cutting unnecessary expenses and starting side hustles to keep income coming in can be helpful, here are some other steps you can take: 

• Adjust your income for income-driven repayment plans. With Federal student loan repayments set to resume in as little as a month, student loan borrowers need to think about their loans again. If you’re laid off, getting on an income-driven repayment plan may be the smartest thing you can do. When you recertify your income at a level that reflects your unemployment, your monthly payment may be close to $0 per month until you get a new job.
• Make minimum payments on other debts (if you can). If you have a mortgage or a car loan, you’ll want to keep making payments on that debt, so you can continue living in your house and driving to get to job interviews. If these payments are too burdensome, consider renting your car (using Turo or HyreCar) or taking in renters for a period of time. Becoming a temporary house hacker while between jobs is another way to stay afloat. Try to make minimum payments on your credit cards each month, even if you can’t aggressively pay off debt. This will protect your credit score. 
• Use a low-interest-rate credit card if you have one. If you must borrow money, use a low-interest credit card. Keep expenses to a minimum, and work to repay the card before the promotional phase runs out and the interest rate increases. 
• Try to build an income stream without taking on debt. Recessions and unemployment often lead to disruptive innovation. But if you plan to test that new business idea, try to do it without taking on debt. Once you have a customer base and income, you can qualify for a business loan at a better rate.
• Seek help instead of money from family and friends. Borrowing money from friends or family could lead to souring relationships. Instead of asking for money, see if your friends and family could help you in other ways. Perhaps you can move in with your parents for a few months while you land back on your feet. Or you could drive a friend’s child to daycare in exchange for using her car for the day so you can get to interviews. This kind of social safety net can get people to rally behind your job-searching efforts instead of leading to bitterness that you don’t have the money to pay them back.

The Bottom Line 

The short answer is that getting a loan is difficult when you’re unemployed. If you have assets, a partner with a stable income, or self-employed income, then you may qualify for a loan. Instead of taking on new debt, try to focus on managing your existing debt until you find a new job and your income has stabilized. 

Remember that as long as you make minimum payments on all your debts, you can get through unemployment with your credit score intact. Your major financial goals may be delayed, but with your new income, you’ll have the ability to get back on track.