Losing your employment unexpectedly implies a big financial hurdle. In this case, it is always wise to maintain several streams of income rather than just relying on that paycheck every month. That way, we can sustain our needs amid multiple economic risks.
However, there are inevitable plans to take on bigger projects to sustain our growing lifestyle—a house, a business, travels, or our children’s education, for instance. Especially if we belong to the relatively low salary bracket, we just can’t finance these aspects independently. This is even truer if we are laid off, quit, or retire.
As they say, the more time we spend idle, the more money we lose. Usually, we either take the next employment opportunity or the business route. Nevertheless, it takes a long time for you to break even, and you would want to bet on something that will guarantee you the biggest return possible.
Often, it requires putting a significant amount of money at stake, usually in the form of a loan. Many who are unemployed are wondering: What, then, are their prospects in qualifying for a loan given the added financial burden this gives to them and the lender?
To answer simply, one only needs to be able to pay fees on time. On the other hand, many more factors come into play. Here are some of them:
Streams of Income
Usually, lenders require any proof to verify your income source. A certificate of employment is primarily accepted given its constant-income nature. In the case of the unemployed, any of the following may suffice:
- Invoice of annual government service contributions, such as retirement, social security, disability, and veteran benefits
- Trust fund or stock interest payments or dividends provided that they are received regularly
- Proof of spouse’s income if they agree to consign on the loan
- Rent received from property
- Long-term disability benefits
- Public assistance
- Alimony received from a divorced spouse
Moreover, some lenders may require further proof that you have a source of liquid cash, may it be in the form of contract or freelance employment, land title in the case of title loans, other investments for sale, or pending receipt of an estate as an heir to a deceased.
To further iron out your qualification, lenders will also compute your debt-to-income (DTI) ratio, that is, how much you owe relative to how much you earn. Simply put, the higher your DTI ratio, the higher the risks they are assuming on your behalf. So, it is common practice to grant borrowers a loan provided their DTI ratio falls between 35 to 50%. Any percentage beyond that may need further proceedings.
Checking the borrower’s credit history is another safety measure lenders do. By using the FICO scoring model, they check how well you were able to manage past debt, that is, how consistent you were with paying by the agreed deadlines and the types of credit you took. Garnering a score between 670 and 739 means you have a good credit history and, therefore, guarantees the cheapest interest rates.
The Personal Decision
Very rarely, you can avail of a loan without having been verified of your income source. Even so, loans require you to regularly allot a portion of your income for monthly dues, urging you to seriously assess from the get-go how capable you are in cashing out for as long as the loan stands. Skipping even just a single payment can be detrimental to your credit score. This runs you the risk of defaulting your loan and becoming less qualified to apply for any other loan moving forward.
If you realize you cannot assume a big financial responsibility, you can always consider a cheaper deal. Since you are unemployed, the lending institution will usually recommend this aside from the following options:
- Shorter payment timeline
- Higher interest rates
- Origination charges to cover for the default risk they are assuming
- Agreement between two parties to automatically deduct from your bank deposits in case of missed payment deadlines
Again, these options open you to higher aggregate costs which you have to ponder seriously. If you realize that now is not the best time to apply for a loan provided that you cannot meet the aforementioned conditions, you can use the time to improve your credit score. A better credit score usually helps you land more favorable loan interest rates and monthly fees.
At the end of the day, living within your means is key. A loan is supposed to help you attain greater financial heights and not pile up along with your debt. Make the most use of it and learn from the not-so-favorable experiences you had with delayed debt and consequential interest payments.