Being out of work can put a great deal of strain on your finances and if an unexpected bill or other big expense crops up, it can be difficult to know where to source the required cash. For those who don’t have sufficient money in accessible savings or investments, the most obvious choice is to borrow. The problem is most types of borrowing, such as personal loans and credit cards, require you to have a steady source of income to qualify.
For this reason, many people turn to payday loans which can provide them with the funds they need fast with no credit check and no need to prove they are employed.
Getting a payday loan when unemployed
While it is possible to get a payday loan if you’re unemployed, you’ll usually need to have some form of income available to you. Exactly what lenders will accept depends on which state you live in, but common examples include unemployment benefits, Social Security benefits, disability income or child support.
Most lenders will ask for evidence that you receive these benefits regularly – perhaps through your online bank statements, for example. You’ll also need to meet the minimum age requirement (18 in most states), have an open and valid checking account, and have a valid phone number to qualify for a payday loan.
What lenders won’t usually worry about is your credit history and as a result, payday loans can be particularly attractive to those with bad credit.
Are payday loans a good idea?
Payday loans are quick and easy to get hold of, which makes them increasingly popular with Americans looking to make ends meet or cover unexpected bills. Once proof of income and identification have been established, a payday loan can be approved in a matter of minutes and funds can be transferred to your account the same day.
The problem with them is the cost. Payday loans are renowned for charging excessively high rates of interest, with the Consumer Financial Protection Bureau (CFPB) finding that a two-week loan of $100 can cost $15. This equates to an annual percentage rate of almost 400%.
A fee of $15 for a $100 loan might not seem a huge sum, but for many cash-strapped consumers it simply isn’t possible to pay back the loan within the initial timeframe and interest can build up quickly. Most payday loans are due to be paid back within two weeks or one month, but more than 80% of payday loans are rolled over or renewed within 14 days.
Each time a loan is rolled over or renewed, additional fees and interest are charged on top, increasing the overall cost of the loan. As a result, borrowers can quickly become trapped in a cycle of debt that is hard to escape. According to a Pew Trusts report, the average payday loan borrower is in debt for five months of the year, spending an average of $520 in fees to repeatedly borrow $375.
All of this makes payday loans particularly risky for those out of work who may not know when they will be able to pay back the loan. Most states only offer unemployment benefits for up to 26 weeks, or six and a half months. For some states, it can be considerably less.
Payday loans should therefore always be considered with care – even when you’re in full-time employment. No matter what your circumstances, it’s crucial that all the better alternatives have been exhausted first before you apply for a payday loan. Payday loans should always be a last resort.
What are the alternatives?
A personal loan can be a good place to start. Personal loans are less risky than payday loans, they typically let you borrow more, and funds can often be transferred to your account the same day.
And while lenders will ask for a steady source of income, it is possible to use Social Security, interest and dividends, child support and disability income, to qualify for a personal loan. Unemployment benefits won’t usually count, however, as it’s offered for a limited time only.
Personal loans are a better option than payday loans for two key reasons. For a start, the terms of personal loans mean you should have years, rather than weeks to pay back the amount borrowed, giving you a greater chance of earning a regular income before your loan is due to be repaid in full. Secondly, interest rates on personal loans are generally far lower compared to payday loans.
Your chances of getting accepted for a personal loan and securing a competitive interest rate will be higher if you have a good debt-to-income ratio and good credit. But don’t despair if your credit score isn’t where it should be – the best credit repair services might be able to give your credit rating a boost.
Alternatively, if you already have a credit card that offers a low rate of interest – or a 0% introductory APR – you could consider using this as an emergency loan to see you through.
Another option is to ask friends or family for a loan. Should you choose to go down this route, you should be clear about when the loan will be repaid, how much you will repay each month, and whether any interest will be added.
Managing your loan
Before you take on any form of borrowing, it’s important to take steps to manage it effectively. Crucially, you must be completely comfortable that you can afford to repay the amount you need to borrow and meet the repayments within the time agreed. Overstretching yourself will only make your financial situation worse and missed payments can result in a derogatory mark on your credit report that could drag your credit score down.
If you’re worried about your financial situation or existing debt, it’s best to talk to credit counselors and seek advice from the best debt consolidation companies and debt settlement companies to see how they may be able to help.