You are jobless, and you are eligible to borrow money. It does sound very strange and begs the question of how you will pay back the debt when you do not have an income source. Loans for the unemployed are emergency loans approved when you are in dire need of money to meet an unforeseen expense, but a lender is not giving away money out of mercy.
You are supposed to pay back the debt along with interest which implies that you must have an income source to be eligible to borrow money. Such loans have got their names because you are not required to be working full-time while borrowing money.
A lender will take into account your passive income to determine how much money should be lent to you. Passive income sources include gains in the form of interest and dividends, rent, and the like.
It is not easy to qualify for unemployed loans as they are riskier than other small loans. A lender will peruse if you are left with enough money to pay off the debt after meeting all of your essential expenses. If your repaying capacity is not above suspicion, your application may be straightaway turned down.
Loans for the unemployed – the devil is in the detail
Loans for the unemployed have been designed to help tide you over when you are jobless. It may take a couple of months to land you a new job, and in the interim, you may come across an emergency. Your savings may not be sufficient to meet that expense, so you will intend to borrow money.
These loans are small, and hence their duration is not more than a month. What borrowers like about these loans most is that they can get rid of them in one go. It may be convenient for you to pay off the whole of the debt in a lump sum, so you do not have to worry about payments.
However, the devil is in the detail. There are a few risks associated with these loans. They are as follows:
High APR
Unemployed loans are as expensive as any other cash loans with no brokers. You do not have a full-time job, which increases the risk of default. To mitigate the risk, a lender would charge a high-interest rate. Even if you have a good credit score, these loans will prove to be an expensive deal.
Most of the time, these loans are applied by people with bad credit ratings. It makes these loans more expensive. The APR for loans for the unemployed and bad credit can cost you an arm and a leg.
It is always advisable that you carefully do proper research so you borrow money from a lender that charges the most competitive interest rates. The APR may vary by lenders because of processing fees, set-up fees and monthly fees. The fee structure varies, and so does the APR.
The risk of falling into debt
Unemployed loans are easy to get approved for. You get the money directly in your bank account the same day you put in the loan application. After a period of 14 days or a month, you settle all dues and then you are free from an obligation.
You do not have to pay back what you borrow, but interest on top of that. When an emergency crops up, you need more money in your savings to meet them and therefore borrow money. Now you do not just have to pay money from your pocket equivalent to the principal but the interest as well.
It increases the repayment burden on your pocket. If your savings did not have the potential to meet £300, for instance, how would you be able to pay £315? As a result, you will end up rolling over the loan.
It means you will ask your lender to extend the repayment period. This will impose interest payments and late payment fees. The amount will keep adding up, and eventually, you will fall into debt.
Understand it by an example.
Suppose you borrowed £300 that you were supposed to pay back in 14 days, along with £45 as a finance charge. When the due date came, you ran out of money, so you decided to extend it for another 14-day period. Now you are to pay £390 (£300+£45+£45) instead of £345 (£300+£45).
If you roll over multiple times, you will end up paying hundreds of pounds as interest, and you will still owe the amount you borrowed.
Your credit score may fall down
Your credit score will not suffer at all if you repay the debt on time, but there are chances that you will fall behind in the repayments. In case you make a default, your credit score will plummet. A lower credit rating will complicate your borrowing money at affordable interest rates down the line.
How can you protect yourself?
Although these loans are subject to risks, it does not mean that you cannot apply for these loans. Here are some tips to bear in mind in order to protect yourself from these risks:
Borrow less than you can afford to repay
By lowering the amount you are eligible to borrow, you will be able to avail yourself of more competitive interest rates. In fact, lenders will protect themselves by lowering the amount you are eligible to borrow. This not only increases the chances of approval but reduces the burden on your pocket as well.
Try to improve your credit score
You should increase your credit score to avail of lower interest rates. A lender will find your profile less risky if your credit rating is good. To improve your credit score, you should pay off all of your outstanding dues.
Make sure you do not have an additional debt at the time of borrowing money to keep your debt-to-income ratio less than 30%. Only apply for these loans to multiple lenders, as multiple hard inquiries can show up on your credit report making it challenging for you to borrow money.
Ensure you will not miss the repayment
An online loan calculator can help you know how much it would cost. This will help you decide whether you can afford to repay this small amount. A debt is affordable only when you can pay it back from your income without compromising essential expenses. You should borrow money only when you are sure your budget has the scope for settling debt.
To wrap up
Unemployed loans definitely have some risks, but you can avoid them by being careful at the time of applying for them. You should do extensive research to choose a lender that lends you money at a lower interest rate.
Borrow money less than you can afford to repay, as this mitigates the risk of a lender. The chances of approval of these loans become high, and you will be able to avail of lower interest rates.
Loans for the unemployed are the best bet only when you are to borrow money to meet an emergency expense. Never apply for these loans to fund any planned or discretionary expenses.