Loans Based Off Of Income: An In-Depth Guide

Personal loans are a useful financial tool that allow you to borrow money for major expenses like debt consolidation, home improvements, medical bills, and more. However, qualifying for a traditional personal loan usually requires a good credit score. If you have limited credit history or a low credit score, you may have a hard time getting approved by lenders.

Fortunately, there are personal loans designed specifically for borrowers with less-than-perfect credit. These loans base approval mainly on your income rather than your credit scores. Keep reading to learn all about income-based loans and how they work.

What Are Income-Based Loans?

Income-based loans, also called income-driven loans, are a type of personal loan that focuses more on your income than your credit scores when deciding whether to approve your application

Lenders offering these loans look at factors like

• Your employment status
• Income amount and stability
• Debt-to-income ratio

They want to confirm you have enough steady income to manage the loan’s monthly payments. While income is the primary factor, lenders still consider your creditworthiness to some extent.

Income-based loans can be easier to qualify for than traditional loans if you have limited credit history, low credit scores, or past credit issues. At the same time, they provide access to lump-sum financing that can be used for any purpose.

How Do Income-Based Loans Work?

Income-based loans work similarly to traditional personal loans:

• You borrow a lump sum upfront and repay it in fixed monthly installments over a set repayment term.

• Loan amounts often range from $1,000 to $100,000, but can sometimes be higher.

• Loan terms are usually between one and seven years. Longer terms lead to lower monthly payments but higher interest costs over time.

• Income-based loans can be secured or unsecured. Secured loans require an asset like your home or car as collateral.

The main difference is the application and approval process. Here are the typical steps:

1. Prequalify: Many lenders let you check your eligibility and estimated rates without a hard credit check. Prequalifying helps compare options.

2. Apply: Submit a full application with personal and income details. You may need to provide income verification documents.

3. Get approved: The lender reviews your application and approves you based mainly on your income, assets, and debts. A soft or hard credit check is done but your scores are not the primary factor.

4. Receive funding: If approved, you’ll get the loan funds deposited directly into your bank account.

5. Repay the loan: The loan agreement outlines your repayment schedule and monthly due dates. Make sure to pay on time to avoid fees and credit score damage.

Pros of Income-Based Loans

Income-based loans offer several advantages, including:

• Flexible eligibility: Your income rather than your credit history is the main approval factor. Those with limited credit or low scores can qualify.

• Fast funding: Many lenders provide access to funds within a few days of approval. The online application process is quick and convenient.

• Multiple uses: Like standard personal loans, income-based loans can be used for any purpose – debt consolidation, home improvement, medical bills, auto repairs, and more.

• Predictable payments: These loans have fixed interest rates and terms, so you’ll make the same monthly payment throughout the repayment period.

• May improve credit: If you make consistent and timely payments, these loans can help build your credit history and scores over time.

Cons of Income-Based Loans

However, there are some downsides to consider as well:

• High rates: Since these loans are geared to higher-risk borrowers, interest rates are often higher than a traditional personal loan. Make sure you can afford the monthly payments.

• Risk of collateral: Secured income-based loans put your home, car, or other assets at risk if you default. Avoid secured loans if possible.

• Credit damage: Missed or late payments can negatively impact your credit, making it even harder to qualify for affordable credit in the future.

• Predatory lending: Be cautious of loans with unreasonable fees, unclear terms, or “guaranteed approval”. These may be signs of a predatory loan. Thoroughly vet any lender before completing an application.

Where To Get Income-Based Loans

You can find income-based loans from various sources, including:

• Online lenders: Online lending companies like SoFi, Upstart, and LendingClub offer personal loans with flexible eligibility requirements.

• Banks and credit unions: Many national banks now provide personal loans online. Local banks and credit unions are also worth checking for loan options.

• Peer-to-peer lending: Websites like Prosper and LendingClub connect borrowers with individual investors willing to fund loans.

• Home equity loans: If you have home equity, you may be able to qualify for a home equity loan or line of credit based on your income and home value.

Always compare interest rates and fees across multiple lenders. Look for the loan with the lowest APR and most affordable monthly payments that fit your budget.

What is The Application Process for Income-Based Loans?

Applying for an income-based loan is relatively straightforward. The general steps are:

1. Prequalify: Many lenders let you check your rates without a hard credit inquiry. Prequalifying allows you to compare loan offers across multiple lenders.

2. Gather documents: Have income verification and personal finance details ready. This may include paystubs, W-2s, tax returns, bank statements, debts, expenses, and assets.

3. Complete the application: Fill out the loan application with your personal information, income details, requested loan amount, and reason for borrowing. Double check for accuracy.

4. Submit income proof: Provide documentation to back up your stated income. This verifies income amount and stability for the lender.

5. Accept the offer: If approved, you’ll receive a loan offer outlining the interest rate, fees, term length, and other details. Make sure you understand and agree to the terms before accepting.

6. Finalize paperwork: Sign your promissory note and finalize any other required paperwork. This ensures you comply with the loan agreement.

7. Get your funds: Once all documents are signed, the lender deposits the loan directly into your designated bank account.

What Income Level Do You Need To Qualify?

Income requirements for income-based loans vary among lenders. However, the general rule is your income should be high enough to reasonably afford the loan payments.

Many lenders look for:

• Gross monthly income of at least $2,000-$4,000

• Minimum annual income between $24,000 and $48,000

• Stable income source – full-time, salaried preferred

• Low debt-to-income ratio, such as 35% or less

While income level is important, having steady, verifiable income is the biggest factor. Gross income may be considered, but lenders focus most on your take-home pay after taxes and deductions.

What Credit Score is Needed?

Since these loans prioritize your income, you can often qualify with lower credit scores around 600. Minimum scores around 500 are also common.

While you don’t need excellent credit, lenders do want to see that you’re creditworthy and financially responsible. Some factors they may consider include:

• Payment history – on time payments preferred

• Credit history length – longer histories preferred

• Credit utilization – lower balances preferred

• Credit mix – variety of credit types preferred

• Inquiries – low number of recent inquiries

• Public records – no recent bankruptcies, judgments, defaults

A soft credit check is done for prequalification. Once you formally apply, a hard inquiry is made but your credit scores are not the primary approval factor.

Can The Loan Improve Your Credit?

Income-based loans can help build your credit if you use them responsibly. On-time monthly payments show lenders you can manage credit and debt.

Over the loan term, making consistent payments can improve factors that determine your credit scores, including:

• Payment history: The biggest scoring factor. On-time payments build your history.

• Credit mix: Income-based loans add an installment loan to your credit mix.

• Credit history length: Loan terms up to 5-7 years add positive history.

• Credit utilization: Income-based loans provide access to affordable credit.

• New credit: Applying for credit adds inquiries but also increases total accounts.

However, late or missed payments on an income-based loan can damage your credit. Make sure you only borrow what you can realistically repay on time each month.

Alternatives To Income-Based Loans

Income-based loans fill a needed niche, but may not be the right product for every situation. Some alternatives to consider include:

• Creditor payment plans: Discuss options with credit card companies, medical providers,