Can You Obtain an Auto Loan While Collecting Unemployment?

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It's possible to qualify for an auto loan while collecting unemployment — it depends on your overall credit and financial situation. For example, you may have multiple income streams from retirement plans, small businesses and other investments. Losing a job and collecting unemployment isn't always a hardship in those situations. However, if your only source of income is unemployment, you may find it impossible to qualify for a car loan.

Considerations

Unemployment benefits are temporary: You receive only a small percentage of your previous salary. Automobile loans usually require payments that last at least three to five years; no traditional bank or credit union is likely to approve such a long-term loan based on temporary unemployment benefits. People eligible for unemployment initially receive benefits for 26 weeks, with certain extensions possible, according to MSN Money.

High-Risk Lenders

Even auto lenders comfortable lending to people with poor credit are unlikely to approve a car loan based solely on unemployment benefits, although exceptions are possible. There's always the chance that a used-car dealer could arrange financing at an exorbitant interest rate. The dealer may steer you to an overpriced car and require a significant down payment with an exorbitant interest rate approaching or exceeding 25 percent. That’s typically a good deal for the dealer, even if it repossesses the car just a few months later.

Existing Credit

If you're unable to qualify for a standard auto loan because of unemployment, consider existing lines of credit, such as a home equity loan. The bank may not request employment verification if the account is in good standing, making unemployment a nonissue. However, the Federal Trade Commission recommends that you not use home equity loans, if possible: These loans are helpful for emergencies, but they can lead to excessive debt if used unwisely. The Federal Trade Commission warns that defaulting on a home equity loan can lead to foreclosure.

Alternatives

If you're unemployed and need a car, consider buying a car for cash, even if that means scrounging around for a used car that's $1,500 or less. That’s less than a down payment on most cars, and it eliminates adding debt during a tough time. Long-term rentals are another option. Major rental-car companies often offer rentals for two-month periods; you can renew the contract for additional months, if necessary.

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