Types of Loans for the Unemployed

Getting any loan in today's economy can be a daunting process, and it is even that much more difficult when you are out of work. Unexpected expenses can pop up when you least expect them: car repairs, medical bills, home repairs and many more. Thankfully there are options you can explore in order to secure the funding that you need.

There are various loan channels, through private institutions or more traditional lending institutions and banks that will grant you varying degrees of funding dependent on some key factors. Collateral will play a major role in your success rate when trying to secure funding; however, you can still secure a loan in the absence of collateral.

Loans for the unemployed, while difficult to obtain, are not impossible. It may take some out-of-the-box thinking, but ultimately the funding you're seeking is in reach, as long as you take the time to educate yourself on the options.

There are four main options when looking for a loan while you are unemployed and we'll discuss each in detail:

Secured Loan
Unsecured Loan
Home Equity Line of Credit
Credit Card Advance

Secured loans are one of the most common and successful forms of loans for the unemployed. A secured loan is a loan that has been backed by collateral from the borrower. The borrower will provide the collateral (often times a car or other property) to the lender to provide some safety to the lender and this ultimately acts as an insurance policy for the lender so he is sure he will either get repayment of the loan or the collateral itself.

The lender would hold the title or deed of the collateralized item and upon repayment of the loan the title or deed will be returned. Should the borrower default on the loan, the lender will then take possession of the collateral and then has the ability to sell the collateral in order to indemnify themselves for the balance of the loan.

Often with secured loans the level of financial risk is lowered because the lender will have a guarantee that most, if not all, of the loan monies will be returned in full. Often times the backing of collateral will allow for more favorable terms on the loan with respect to interest rates and payment schedules. In some situations you can even use your existing bank account at a lending institution as collateral toward a secured loan.

Unsecured loans, unlike secured loans, are not backed by any collateral. These loans for the unemployed are often referred to as "signature loans", as the borrower will often have to sign off on an agreement outlining the terms, interest rates, and payment schedules. Given the lack of collateral, the loan often represents a larger risk to the lender. Correspondingly, the terms and interest rates associated with these loans are often much more favorable to the lender, as he is absorbing an enormous amount of risk with this transaction.

The overall amount of the loan is usually between $100 - $1,500, as compared with a secured loan where the loan can generally be up to the value of the collateral, which in the case of a car can be many thousands of dollars. Since the entire risk of these loans ultimately rests with the lender, the interest rates associated with the transaction are higher than their secured loan counterparts.

While unsecured loans are available through traditional institutions, you can also pursue private party lending as another option. This can be done by drafting a personal contract with a family member or friend stating the terms of the loan as well as a payment schedule. While this method is informal, the contract can be legally binding and will likely hold up in small claims court should the loan end up in default.

A home equity line of credit (HELOC) is a line of credit offered by a lender where the collateral is the equity in the borrower's house.  This is literally a line of credit, instead of a traditional loan where you are given a lump sum upfront.  With this line of credit, the lender agrees to give you a maximum amount of credit that you can ultimately draw upon as you see fit. 

This is similar to a credit card in many regards:  you have a maximum credit limit, and you can access the money and borrow against it up to that limit.  The borrower often will have a minimum payment due each month that represents the interest amount due on the borrowed money.  The interest on a HELOC is variable, so it can fluctuate over time depending on the prevailing interest rates.  But interestingly enough it is tax deductible, in similar fashion to a traditional mortgage (currently up to the first $100,000). 

By using the equity in your house in this manner, you are ultimately taking out additional mortgage principal on your house, so please keep that in mind.  However, if you are unemployed and want to tap some emergency funds that really is your own money (equity in your house), then a HELOC can be a very smart choice.

A credit card advance, often called a "cash advance", is a loan against your credit limit where instead of purchasing goods and charging it to your credit card you actually receive cash in hand.  Unlike most credit card purchases where the only fees are levied against the store owner, there is often a fee to the borrower of roughly 1-4% of the cash advance.  Also unlike a traditional credit card purchases, there is no grace period for the accrual of interest.  Interest starts accruing the second you take the cash advance, regardless of how quickly you pay it back. 

The interest rates associated with a cash advance are usually astronomically high (20% interest is not uncommon), which makes this an absolute last resort for anyone in need of additional funds.  It is essential that you exhaust all other avenues first before you try for a cash advance from your credit card.  That said, it is an effective way to get cash in your pocket in an absolute emergency, and we would be remiss if we didn't present it as an option for a loan for the unemployed.