A recession is a temporary economic decline that impacts trade and industry and may result in reduced profits and layoffs.
One notable effect of recessions is that banks and other lenders are less likely to approve loans. Why does this happen? A decrease in sales, profits, and layoffs means people with loans are more likely to default or file for bankruptcy during a recession. This pushes lenders to enforce stricter lending criteria for new borrowers. But getting personal loans during a recession isn’t impossible. You can improve your creditworthiness and make yourself a better candidate for one.
Here are some of the steps you can take to help you secure a loan during a recession.
Maintain a stable income
.........................
During a recession, lenders may worry that their customers may be unable to make payments on time or at all. A spotty employment history, periods of no income, or a recent layoff/furlough may indicate to them that you may not be able to repay what you borrow. On the other hand, a steady income is a green flag. It’s not always possible to predict layoffs but pay attention to signs like budget cuts, restructuring, and big-ticket projects being axed.
Unfortunately, there’s not much you can do if you’re laid off or furloughed except try to land your next job as soon as possible. Stay active in your professional network, update your resume, and sharpen your interview skills.
Pay attention to your payment history
.........................
Payment history plays a significant role in your loan application. Late and missed payments remain on your credit report for up to six years in Canada; a series of late payments may indicate financial issues or poor debt management skills.
Meanwhile, timely payments made in full every month indicate the kind of responsible credit habits that lenders seek. This includes paying your credit card bills during the grace period (and in full where possible) and making timely car or mortgage payments. Consider setting up payment reminders or automatic payments if you can.
Debt-to-income ratio
Your debt-to-income ratio (DTI) is an expression of how much you owe compared to how much you earn. Calculate your DTI ratio by dividing the sum of your debts (including mortgage, car loan, credit cards, etc.) by your yearly income. For example, if your annual income is $75,000 and you collectively owe $25,000, your DTI ratio is 25000/75000 x 100. That’s 33%. Lenders are looking for a low DTI ratio demonstrating that you earn enough to pay off your debts comfortably. People with a high DTI ratio want to pay down some of their existing debt before applying for a loan.
.........................
While securing a personal loan during a recession is not impossible, it may be more challenging than usual. You can also consider other options, such as getting someone with good credit to cosign your loan or applying for a secured loan with an asset such as a car or home as your collateral.