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Can You Take Out a Loan Without Having an Employment Contract?

Loans play an integral part in people’s lives. Individuals take out loans for different reasons, from funding their education to purchasing houses, among other reasons.

One of the main requirements banks and other lending institutions require from loan applicants is proof of employment. In simple terms, borrowers have to provide something like an employment contract that proves that they are employed and have a steady flow of income. On sites like you can find other useful information in regards to taking out loans.

But what if an individual isn’t employed and doesn’t have an employment contract? Can they still qualify for a loan? Stick around to find out.

What Is an Employment Contract?

An employment contract is a contract or a signed agreement between an employee and employer once a particular company hires an individual.

This contract mainly states the responsibilities or what is expected of both parties; the employer and employee.

Other information found in an employment contract includes the employees’ salary or wages, duration of employment, and the employees’ work schedule.

There are several types of employment contracts. Among them are fixed-term contracts, temporary employment contracts, and internship contracts.

Banks and most other lending platforms require borrowers to provide an employment contract as proof of employment. This assures them that the loan applicant can afford to pay back the loan.

Can You Still Qualify for a Loan If You Are Not Employed?

Yes, it’s still possible for an unemployed individual to get a loan. However, since they don’t have an employment contract, the bank will need some other proof of income. This could profit from a business, disability income, retirement benefits, child support, alimony, and government annuity payments.

Another thing banks look at before giving loans to borrowers without an employment contract is their credit score and history.

If an individual has a positive credit score and history, the bank or lending institution will be confident that they can pay back their loan.

Most banks also check their unemployed loan applicants’ debt-to-income ratio. This is the ratio of an individual’s monthly debts to their gross income. Many lending institutions use this to determine whether a borrower is financially capable of taking a loan.

To determine an individual’s debt-to-income ratio, their monthly debt is divided by  gross income (from any income source.)

So, the higher the debt-to-income ratio, the lower the chances of a borrower getting a loan.

Most banks and lending institutions prefer giving loans to borrowers with a debt-to-income (DTI) ratio of 30-50%.

What Are the Risks of Taking a Loan When Unemployed?

There are several risks to taking out a loan when unemployed. Since the individual doesn’t have a steady source of income, they may have trouble paying back their loan. And when a borrower doesn’t pay back their loan as expected, their credit score will be negatively affected, causing them to have difficulties taking out loans in the future.

People without an employment contract may also qualify for a lower loan amount. This might not help them, especially if they wanted to take care of bigger responsibilities using that loan.

Factors to Consider Taking a Loan While Unemployed

The main factor an individual needs to consider before taking out a loan, especially if they are unemployed, is their ability to pay it back.

Can they pay back the loan within the set repayment period? Can they afford to make the monthly payments to repay the loan?

If the answer to these questions is no, an individual should look for other alternatives to get the money. This is because failing to repay the loan within the set repayment period or according to the lender’s terms may damage their credit score. This may make it challenging for them to qualify for a loan in the future.

Alternatives to Taking Out a Loan While Unemployed

An excellent alternative to taking out a loan without an employment contract or while employed is borrowing from family and friends.

With close family and friends, the repayment terms may be more flexible. What’s more, the borrower doesn’t have to worry about interest rates.

Another great alternative is taking out a co-signer loan. Most banks and lending institutions require unemployed borrowers to provide a co-signer. This is an individual who signs an agreement that states they will repay the loan if the borrower can’t.

The co-signer has to have a good credit score and proof of steady income for them to qualify.


While taking out a loan without an employment contract is possible, it still is risky as the individual may not have steady sources of income. This may make it difficult for them to repay. Therefore, it is recommendable for unemployed people to consider other alternatives to obtain funds before considering taking out a loan.

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