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That said, getting approved for a personal loan during a recession is not impossible and there are steps you can take to solidify your financial profile and credit health. Otherwise, there are plenty of alternative options when seeking out a personal loan during a recession.
Read on to find out how to maximize your chances of loan approval in the midst of an economic downturn or a recession.
Can You Get A Personal Loan During A Recession?
While lenders continue to issue loans during times of economic volatility, they're more careful about who they lend to. The reason being a weak economy often means higher unemployment rates and a drop in property values, which equates to higher risks for the lender as it increases the borrower’s odds of defaulting.
The risk lenders assume when handing out loans increases during a recession. As such, they'll typically require that borrowers meet more stringent lending criteria to minimize this risk. If you apply for a personal loan during a recession, expect to have your finances and credit profile assessed more carefully.
How To Get A Personal Loan During A Recession
In order to qualify for a personal loan during a recession, you need to understand what criteria lenders use to determine your creditworthiness. Focusing on strengthening these factors before applying can help boost your odds of getting approved for a personal loan during a recession. Here are some factors lenders will inspect more closely:
- Your income and employment - Lenders want to make sure that your security at work is solid. They also want to see that you earn a steady income. Any gaps in paycheques may indicate to lenders that you’re risky as a borrower.
- Your credit score - As always, your credit score plays a crucial role in your creditworthiness. A higher score means you're more likely to pay your debt on time. In today's economic climate, you may need a higher credit score than before to make the lender feel more comfortable about lending to you.
- Your debt-to-income ratio - Your monthly income relative to your monthly debt tells lenders how much income you have left over to pay other debts or expenses. The higher this ratio, the less likely you'll be able to comfortably carry an additional loan. Keep this number as low as possible to boost your odds of loan approval, especially during a recession.
- Security - In the event of a financial emergency — such as the loss of a job — it's important to have extra funds available. Your lender will want to see ample savings in your bank account or other forms of assets that you can access to cover your loan payments.
How To Apply For A Personal Loan During A Recession
To secure a personal loan during an economic downturn, follow these steps:
1. Assess Your Finances And Credit Score
As previously mentioned, lender criteria usually become more strict during a recession, as such, it’s important to assess your financial and credit score to see where you stand.
- Check your credit score - See where your credit score is at. If it needs improvement, consider taking some time to give it a boost before applying for a personal loan. Remember, your credit score plays a key role in your ability to get approved for a loan, and it may need to be even stronger when applying during a recession.
- Pay down your debt - The less debt you have on the books, the lower your debt-to-income ratio will be. This will leave more money available to cover additional loan payments and will increase your chances of getting approved for a loan.
2. Decide How Much To Borrow
The higher the loan amount, the more your lender will scrutinize your finances as higher loan amounts carry more risk than smaller amounts. Applying only for what you need can help you qualify for that specific loan amount. Moreover, you don't want to borrow any more than required, as this will add to your debt pile more than necessary.
3. Get Pre-Qualified To Get More Accurate Offers
Getting pre-qualified for a loan involves the lender conducting a basic assessment of your income, assets, debts and overall financial health. Lenders will use this information to provide you with a pre-approved loan. You can then use this information to more accurately compare loan offers from various lenders to find the lowest rate and best terms without undergoing a hard credit check.
4. Apply For A Loan
Once you've decided which lender to work with, complete their loan application and submit all required documents. Make sure there are no inaccuracies on the application before submitting it to avoid any hiccups in the process.
What Kind Of Interest Rate Will You Get During A Recession?
The interest rate lenders offer will be based on your income, employment, assets, debts, and credit score. But during times of economic stress, the rate may be higher than usual.
To ensure you get the lowest rate possible on a personal loan, you'll need to apply with a strong credit score, low debt-to-income ratio, and steady employment.
Why Is The Interest Rate Higher During A Recession?
Recessions bring about added risks for lenders. In this climate, lenders typically increase the rates they charge for loans. For instance, recessions can cause a spike in mortgage interest rates, making it more expensive for Canadians to buy homes.
Tips On Applying For A Personal Loan During a Recession
Not only do you want to maximize your chances of getting approved for a personal loan during a recession, but you also want to get the best terms and lowest rate to make your loan as affordable as possible. That's why it's so important to take a few minutes to compare different offers from various lenders to see where the best deal lies.
Here are a few tips to consider when applying for a loan when the economy is in a slump:
Calculate The Cost
Find out exactly how much your loan will cost you based on the specific rate and fees each lender charges. By calculating the cost of your loan, you’ll be able to tell approximately how much you'll pay every month as well as how much the loan will cost you over the term. You can also get a breakdown of how much you'll pay in total interest over the life of the loan. Use these figures to compare all offers to see which loan fits best within your budget.
Avoid Adjustable-Rate Loans
Adjustable-rate loans might make sense when rates are expected to dip at some point throughout your loan term, but they're not the best choice during a recession. Generally speaking, interest rates dip during the early phases of a recession to encourage more spending and borrowing. But as the economy starts to improve, rates will eventually increase which can cause your monthly payments to rise.
How To Increase Your Odds Of Qualifying For A Personal Loan During a Recession
Aside from the typical ways to position yourself to get approved for a loan — such as boosting your credit score — there are other savvy ways to improve your chances of qualifying for a personal loan during a recession:
Apply With An Alternative Lender
If your current credit score and financial profile aren't strong enough to qualify for a loan with a conventional lender, consider applying with an alternative lender instead.
The lending criteria with traditional lenders are already tough enough, but during a recession, they're even tougher. You may have better luck qualifying for a personal loan with an alternative lender, as these types of lenders are typically less stringent when it comes to lending requirements.
Catch Up On Payments
If you have a late payment on your record, pay it immediately. Loan payments that are less than 30 days late might not have an effect on your credit score, but more than 30 days past due can negatively affect your credit. Before your credit takes a hit, be sure to catch up on any late payments, especially before applying for a loan.
Reduce Your Debt-To-Credit Ratio
Your debt-to-credit ratio is one of the many factors that affect your credit score and is something lenders look at when assessing a borrower's ability to secure a loan. Also referred to as a credit utilization ratio, your debt-to-credit ratio is a measure of your available credit relative to how much of it you're using. Generally, the lower the ratio, the more positively it may affect your credit.
If your debt-to-credit ratio is on the high end right now, work towards paying off that debt to reduce this number.
Dispute Errors On Your Credit Report
Mistakes on your credit report could be dragging your credit score down unnecessarily. Pull a copy of your credit report and scan it for errors. If you spot one, have the credit bureau investigate and rectify it immediately.
Benefits Of A Personal Loan During A Recession
Applying for a personal loan might mean one more bill to pay every month, but there are some perks to having a personal loan when economic times are tough:
- Lower interest rates. Different loan types come with different rates, some higher than others. Personal loans tend to come with rates that are much lower than other types of loans, such as short-term payday loans.
- Higher loan limits. Personal loan limits are also a lot higher than other types of loans or credit products. Depending on your financial and credit profile and the lender, you may qualify for a personal loan for as much as $50,000.
- Predictable payments. One of the many benefits of personal loans is that they come with a predictable payment schedule with fixed monthly payments, making them easy to budget for.
Risks Of Getting A Personal Loan During a Recession
Along with the upsides of personal loans, there are a few downsides to consider:
- Higher risk. Borrowing during a recession is risky business, especially since there's a heightened risk for financial issues, including job loss and drops in home equity. Your bills still need to be paid every month, regardless of what your financial situation is like. Adding another bill to the mix will just add to your financial burdens.
- Hard to find a lender. Many lenders tighten their lending criteria to minimize their exposure to risk during recessions. This will make it more difficult to get approved for a personal loan. Plus, lower rates that often characterize recessions mean lenders won't make as much money off their loans, so they may be less willing to loan money if they're not satisfied with the profit margins.
Final Thoughts
Getting approved for a personal loan during a recession might be a challenge, but it's certainly not impossible. It's still important to get your finances in order and ensure your credit health is in check, as well as do a little homework to compare loan options to find the best deals.
