Personal loans are usually repaid over an agreed period of time through monthly instalments. The lender will make a judgement on how much it thinks you can afford to pay each month and therefore how much you can afford to borrow overall. This system is complicated if the applicant does not have a regular income, for example because they are unemployed. Most major lenders will reject any unemployed applicant because there is too great a risk that the loan will not be repaid if there is no regular income to fund the monthly repayments. However, there are still ways for unemployed people to solve financial emergencies, spread the cost of purchases and even borrow money. In this article we will cover the different options available and the alternatives to personal loans for unemployed people.
Can you get a loan if you are unemployed?
Your personal financial circumstances will be assessed by the lender when you apply for a loan in order to work out how easy it will be for you to repay the debt. The more money you have coming in, the more likely it is you should be able to afford the monthly repayments on your loan. If you have no source of income, you are unlikely to be accepted for a loan because the lender will not be confident that you can afford to repay the debt. This means that unemployed people are generally seen as high-risk borrowers by lenders and are unlikely to have loan applications approved. However, there are few lenders that specialise in loans for people with low incomes.
If you have no regular income but do have a valuable asset, such as a house, you may be able to borrow against the property with a secured loan. Whether or not you are approved for a secured loan can depend more on the value of the asset you are securing the loan against, than your own financial circumstances.
It is important to distinguish between being unemployed and having no income. Some state benefits may be considered as a regular income by specialist lenders, as could interest on savings or dividends on shares.
The principle is that a lender will need to be confident you can afford to repay what you owe while complying with its lending criteria. For most major banks and lenders, this criteria will include a minimum income amount.
What are personal loans for unemployed people?
There are a few types of loan that people who are unemployed should have more success with when compared to applying for a traditional personal loan. Here are a few options to consider:
- Guarantor loans function in a similar way to a personal loan, but with a friend or family member acting as a ‘guarantor’. This person will need to agree to meet the repayments on your behalf if you are unable to. The guarantor themselves will likely need a regular income and strong credit history, as they will be jointly liable for the debt. We explain more about guarantor loans in our article ‘What is a guarantor loan – should you take one out?’.
- Payday loans are high-interest, short-term loans that need to be repaid in just a few weeks or months. If you repay the money on time, they can be useful. However, the rate of interest is often very high, meaning what you owe will grow at a rapid speed if you cannot meet your repayments. Payday lenders will accept a wider range of applicants than mainstream lenders – including those with little or no income – but they are still best avoided.
- Specialist loans for unemployed people are usually very high interest, as the provider will look to offset the risk of lending to someone with no or a low income by boosting their return through interest. You may also find that these types of loan are only available for low amounts of money.
- Secured loans are different to unsecured personal loans, as they require a valuable asset to be secured against the money borrowed. This means that if you do not repay, whatever you put up may be sold to settle the debt. In most cases you will need to be a homeowner to get a secured loan, which means your property will be at risk. Lenders are more likely to agree to a secured loan for someone with no or low income as it is less risky for the provider than an unsecured loan, though you will still need to show that you will be able to meet your monthly repayments. We explain more in our article ‘What is a secured loan?’.
- Buy Now, Pay Later (BNPL) schemes now appear almost anywhere you can make an online purchase and can seem like a great way to spread the cost of something you need to buy. However, they are not technically loans but a form of credit, like a credit card. This means that what you owe and the fees you need to pay can quickly pile up if you start to miss deadlines.
How to get a loan if you are unemployed
Getting a loan while you are unemployed is likely to be challenging, so you should first seek out some free, independent and impartial advice. Navigating a host of different borrowing options can be confusing at the best of times, but the added instability of also being unemployed can make it very easy to slip up. Borrowing from the wrong source at the wrong time, or borrowing unnecessarily, can make your financial situation worse. Check out the free resources offered by organisations such as:
You could also check out our article ‘Where to get free debt advice’ if you are planning on borrowing to clear existing debt.
What about personal loans for unemployed people on benefits?
There are government loans that are exclusively available to people on certain benefits. These ‘budgeting loans’ are interest-free, but can only be used for essentials such as food, clothes and household bills. The repayments are then taken directly from your future benefit payments.
Only people who have claimed specific benefits for at least six months will be eligible. These benefits include:
- Income Support
- Income-based Job Seeker’s Allowance
- Employment and Support Allowance
- Pension Credit
You cannot get a budgeting loan if you claim Universal Credit. However, claiming some benefits may be seen by certain lenders as a form of regular income. This makes it more likely that you will be able to get a loan than someone with no money coming in, but it is still unlikely that a major UK bank would approve such a loan.
The benefits most likely to be considered by certain lenders as a form of regular income include:
- Universal Credit
- Personal Independence Payment
- Disability Living Allowance (Personal Independence Payment)
- Employment and Support Allowance (formerly Severe Disablement Allowance or Incapacity Benefit)
- Industrial Injuries Disablement Benefit
- Incapacity Benefit
- Child Tax Credit
- Child Benefit
- Fostering Allowance
Pros and cons of a personal loan for unemployed people
Here is a summary of the main pros and cons of a personal loan for unemployed people that you should consider:
Pros of a loan for unemployed people
- Access cash quickly - You will be able to get the money you need faster than if you saved up over time, but you will pay for the convenience through interest on your debt.
- Consistent repayments - Personal loans are usually fixed rate, so you will know how much you need to pay each month to clear your debt. This can help you budget and prioritise your outgoings.
- Potentially cheaper than other forms of debt - Personal loans usually come with a much lower rate of interest than a credit card or overdraft, but you will not benefit from the flexibility and the interest-free periods offered by credit card providers.
- Build a credit history - Repaying a debt on time and in full will help you fill your credit file with examples of responsible borrowing. This can boost your credit score and help you access the top rates and products in the future.
Cons of a loan for unemployed people
- Taking on debt - You should think twice about applying for a loan if you have existing debt or a history of struggling to repay debt. Taking on more could push you into a debt spiral and an even worse financial situation.
- Difficult to repay - In order to repay a loan, you will need to be able to afford the monthly repayments. A lender will make this judgement before your application is approved, but you should also think about it yourself. Taking on debt with no clear plan of how to repay the money is generally a bad idea that will pile extra interest and charges onto your money woes.
- High interest rates - The interest rate on your loan will likely be at the higher end of the market range if you are unemployed. This is because the lender will want to balance out the risk of you not being able to afford the loan with additional profit. For you, it means borrowing the money will be expensive.
- High chance of rejection - If you are unemployed, there is a strong chance any loan application you make will be rejected. Loan rejections will show up on your credit file and can make it harder to borrow in the future, as other lenders may not see you as a reliable borrower. Read our article 'Need a loan, refused everywhere in the UK? What to do now' for tips on what to do if your application is rejected.
Alternatives to personal loans for unemployed people
A personal loan is not the only way to borrow money and far from the only way to fund a new purchase. If you are in a difficult financial situation – such as not having a regular income – your best option is likely to be saving up for what you want to buy. If you cannot afford to save up, it is likely that you would also struggle to meet the repayments on a loan.
Alternatively, if you are recently unemployed you may already have a credit card that you could use to spread the cost of certain purchases and build your credit score to make borrowing easier in the future. If you do not have a credit card, you could look into credit builder credit cards, as these providers are more likely to accept applicants in challenging financial situations. Keep in mind that you will need to clear your balance by the end of the repayment period or what you owe will likely grow at a particularly high rate of interest. These cards also usually come with low credit limits.
If you own your home, you could explore secured loans. These are higher risk, as the asset you secure against the debt could be sold if you fail to repay what you owe. However, you may stand a better chance of being approved if you have no or a low income versus a personal loan.
Other help if you are unemployed
If you are unemployed, you may be entitled to certain government benefits. How much you are able to get and whether it will make a significant difference to your financial situation will depend on your age, the amount of money you or your partner have in savings, what assets you own, what your partner earns and your history of National Insurance Contributions (NICs).
The calculator on the EntitledTo website can be a great place to start to find out what support you could access. In some cases, you may be able to get an advance on certain benefits to help you through a tricky financial period. You may also be able to access discounted travel, free school meals, free NHS prescriptions, Council Tax reductions and cheaper broadband and mobile tariffs.
