Should you use Payday loans in unemployment?

Being out of work can be a constraint strain on your finances. If any unexpected bill crops up, gauging the facility to finance it could be challenging. For individuals lacking sufficient savings and investments, borrowing emerges as the most obvious choice.

Yes, the unemployed can qualify for a loan. Not every personal loan lender lends to the unemployed. And individuals lacking consistent income proof must be cautious about adding debts to their credit report.

While unemployed individuals may not qualify for car loans or mortgages, they may get payday loans. These loans do not require an individual to have a regular income. One may qualify even for unemployment benefits.

Slow economic development leads to unemployment and furlough, resulting in more people seeking short-term cash assistance. Payday lenders verify the borrowers’ affordability with the minimal income proof they can provide.

Is using a payday loan in unemployment, right?

It is viable to clear the payday loan dues with your unemployment benefits, but it may not be the best choice. These loans are small loans for emergencies and have competitive interest rates. One cannot pay the loan unless one has a part-time income.

The reason is one can avail of unemployment benefits for a particular time. The government may not support the person for long if he shows no possible signs of getting a job or efforts towards it. If you miss any payment, the missed payment penalty and interest costs could impact your finances.

Here are some situations where you can tap loans when unemployed as a viable opportunity.

a)     You have a secondary income source

Individuals having a secondary income source like- rental income, part-time income, investments, etc., may apply for one in emergencies. One may qualify for a flexible amount to meet any urgencies. The primary condition in payday loans is income and affordability. Having multiple income sources help the lender ensure assurance about comfortable repayments and loan closure.

b)     Need only a small amount

An individual can get around £1500 in payday loans. However, you do not necessarily borrow a higher amount. If you have a small cash requirement like –

Suppose you need £150-£400, the loan may be apt for you. Borrow only the amount you need and as per your repayment availability. 

c)      You have an employment letter confirmation 

Yes, lenders factor in this aspect while providing the payday loan. If you have a joining letter and an urgent cash need before that, get a payday loan. The joining letter is concrete proof of you paying the loan within 12 months. Thus, you may get a loan for your needs.

While these are some situations in which applying for a payday loan can be apt for out-of-job individuals. There exist some instances too where these salary-day loans can impact your finances.

d)     You have a good debt-to-income ratio 

It is also one of the important factors that lenders consider while providing payday loans. A lower DTI (Debt-to-income) ratio can help you qualify for funds for unemployment benefits. You can tap these if you have a pressing cash need with no other source to finance it.

The low number of debts in your profile as compared to income can help you qualify. Maintaining your DTI while unemployed is challenging. If you can do so, then you may get one.

When should an unemployed avoid getting a payday loan?

Payday loans seem attractive to the unemployed because lenders do not factor in credit scores here. They help cover any unexpected costs in minutes with a quick fund transfer. However, it may not be apt idea for everyone. Here are some situations wherein payday loans may disrupt the unemployment lifestyle:

The available budget only suffices for liabilities 

No matter how urgently you need cash, analyse your finances. Payday loans are easier to qualify for; interest builds up quickly. Analyse your total income and liabilities. For example, if your monthly income is £500 and your expenses total £450/month; it may not be an ideal option.

You may qualify for the loan, but it may not be in your best interest. The overall costs can hurt your budget.

·         Share a need over £1500

Individuals may strike any cash urgency that might exceed the cash requirement expectations. If your needs exceed £1500, drop the idea of payday loans.

Here, you can try alternatives like asking a friend for help or getting a bad credit loan with a guarantor. These loans are strictly for emergency purposes within that range. You can try to bridge some amount and tap other sources for the remaining amount.

·         Running out of unemployment benefit facility

The government offers unemployment benefits for 26 weeks. If you believe your unemployment benefits tenure is about to end and do not have any part-time income, you should avoid applying for the loan.

Payday loans should be the last resort in that case. You should instead seek emergency fund help if you need immediate medical assistance. Check whether you can get some help from your loved ones or friends. You can also check your investments, if any, to pay the bills.

What Are Some Alternatives to Payday Loans For The Unemployed? 

Payday loans are ideal for individuals seeking emergency cash, to pay it comfortably, individuals must budget and save a certain amount every month. However, unemployment with a slim budget is challenging. Here are other alternatives to payday loans:

1.      Short-term loans

These loans are more affordable than payday loans. Unlike payday loans, you can split the payments into comfortable halves in these loans. Unemployed may qualify for better interest rates with a stable credit profile and income from benefits sources.

2.      Check your overdraft

Check whether you can use an overdraft facility for minimal cash needs. Some banks allow interest-free drafts. It is still cheaper than payday loans, even if you have to pay for their use. However, you may get only a small amount of help.

3.      Check out a guarantor loan

If you have someone that could act as a guarantor, you may meet your needs comfortably. It is helpful when you need money urgently but lacks a good credit score. 

Bottom line

Evaluate your financial situation and circumstances before borrowing payday loans. 

You must be comfortable with paying the interest rates and other costs that come along. The best approach would be to avoid these loans in unemployment. 

Set up a budget for unexpected expenses. It would be challenging initially but helps you when you need it the most. On the other hand, if you believe you can manage payday loans with a second income, you may grab one.