Becoming unemployed especially with no savings to rely on, will inevitably make it difficult to make your monthly payments. When this happens, many turn to loans to solve their financial problems. Even though this is often done, because of the limited options available to those who are unemployed, you may cause yourself to be in a worse financial position in the long-term. Before taking a loan out when you are unemployed, you need to compare loans to see which one best applies to your situation. This guide will break down the different types of loans available to those who are unemployed.
If you become unemployed, your lack of a regular income can make it difficult to keep on top of your monthly outgoings. Whilst high street banks and credit unions are unlikely to lend to someone without a job as they will ask for a full credit report and details on employment when applying. However, there are lenders that specifically loan money to those on benefits, out of work, or with a poor credit history. Although this can seem tempting, these loans will often have a high level of interest and if you fail to meet the payments it can cause your debt to spiral out of control.
Payday loans are one of the most common ways those who are unemployed borrow money. These are short-term loans with high interest rates that are designed to get people through to the end of the month. They are paid quickly into your bank account and are available to people with poor credit history. Although these may seem attractive, they can quickly become very costly because of roll over interest and charges for missing a payment. Because of this, the typical user of a payday loan is actually someone who is paying off a previous payday loan. If you are unemployed these may not be the best option because if you cannot make the payments in the first place you will be unlikely to make them by the end of the month, at which point the costs will only increase.
Doorstep or ‘home collection’ loans are a way of borrowing small sums of money that is delivered in cash to your doorstep. They are typically for between £50 and £500 and are often used by people without a bank account. To apply for one, you must register your interest with a company and a representative will then visit your house, conduct an interview, and return weekly to collect repayments. Like a Payday loan, these type of loans will often be a much higher interest than a typical loan, and if you are unable to make the repayments it can be intimidating to have debt collectors come to your house every week.
A guarantor loan is a form of unsecured loan where you nominate someone who can make the payments if you are unable to. The person you nominate must have a good credit score and demonstrate to the lenders that they are able to make the payments should they have to. Because of this lower risk, these are typically used by people with a poor credit history or without a regular income. However, before taking this on you must make sure that your guarantor is aware of the risks and is willing to pay for you, this is why it will often be a member of your family.
Credit unions are community organisations that are run on a not-for-profit basis and aim to provide low rate loans. They are essentially cooperatives where members will pool their savings and lend money to one another. Despite being outside the traditional lending sector they are still regulated by the Prudential Regulatory Authority and the Financial Conduct Authority. These are attractive because they’ll often only be charging 1% a month and there are no hidden charges or penalties for paying them back early. In order to get a loan from a credit union you must become a member, and some require you to show that you have built up some savings first.
Secured loans are a form of borrowing that give you a low rate because you put an asset up as collateral. Most often this is your house or car which the lender will legally be allowed to repossess if you cannot pay off the debt. These loans are useful because even though you don’t have a regular income the lender will reduce their own risk and therefore offer you a lower rate. However, there are serious risks when it comes to secured loans as you could lose your home.
Find out which loans you could be eligible to take out, without affecting your credit score