Unemployment can severely hurt your financial situation, and personal loans may seem like an attractive option to help you make a living. It is possible to provide loans to the unemployed, but you may have to prove that you have another source of income – and the lender may look at your credibility more closely.

If you are unemployed, here are some tips on applying for a loan, and some information and options to consider before you apply. Lenders will consider multiple factors when evaluating new loan applications. In the end, they want to know how likely you are to repay the loan.

Income

In the lending sector, income is often a big consideration, which is why unemployment makes personal loans more challenging. But if you have a source of income other than traditional work, you may still have the opportunity to qualify. Below are some examples of common alternative income.

Spouse's income: If you are married and the lender allows, you can include your spouse's income in your loan application. If you can use this income to repay the loan, this may be allowed. If you choose to use your spouse's income as a source of income, you may need to list your spouse as a co-applicant.

Investment: Capital gains or funds from investments such as real estate may help indicate your ability to repay your loan. One-time capital gains may not be considered, but may be allowed to receive recurring income from dividends or leased property if approved by the lender.

Retirement benefits: Social security benefits or regular 401(k) pensions may qualify if you retire.

Other expenses: unemployment, alimony and child support can be used as other predictable sources of income.

However, it should be noted that the Equal Credit Opportunity Act prohibits lenders from requiring you to disclose certain types of income, including public assistance, alimony and child support.

Debt to income ratio

Another factor that a lender might consider when deciding whether or not you are able to repay a loan is your debt-to-income ratio. This is calculated by dividing your total monthly debt by your total monthly income. Your total income is usually your income before deducting your salary, such as taxes and insurance.

If your debt-to-income ratio is too high, the lender may use this to show that you may not have enough income to pay off your debt and daily expenses.

Credit history

Your credit is also the key to the lender's assessment of whether or not to give you an unsecured personal loan. The lender will almost certainly take a look at your credit score, and you can also consider the payment history and other information on your credit report, such as past bankruptcy or collection accounts.

The Federal Fair Credit Reporting Act requires consumer reporting agencies to maintain fair and accurate information in your documents that lenders can consider. While strong credit may not fully cover the lack of income, when you try to get a loan, it may put pressure on the positive side.

Risk of borrowing when you are unemployed

If you default, the loan is risky to both the borrower and the lender. Before you borrow money when you are unemployed, let's take a look at some of these risks:

Default: When you are lending without a job, one of the most obvious worst-case scenarios is the inability to repay the loan. Not paying back the loan can damage your credit and lead to collections, making the already challenging financial situation even worse.

Higher interest rates: If your income is low, you can still get a loan - but it is more likely to be accompanied by higher interest rates. Higher interest rates mean higher overall loan costs.

Short repayment period: If the lender determines that you are a riskier borrower, you may be limited to a loan with a shorter repayment period. This is because lenders are less likely to believe that your financial situation will change in the short term.

Together, these risks are a good reason to consider alternatives to loans when you are unemployed.

Alternative to personal loans

Credit card: You may already have a personal loan to choose from in your wallet.

Credit line: Personal credit lines are similar to how credit cards work. You can increase your balance and pay it multiple times during the life of the account.

Secured Loans: You may consider using a house or other asset as a collateral for a secured loan.

Home equity line of credit (heloc): This is the credit line attached to the value of the home. This is a form of secured credit that means your house is a collateral, and if you default on your repayment obligations, you may lose it.