Having a low credit score can impact your eligibility to borrow money via a traditional loan. However, income-based loans aren’t based on your credit score or tied to a specific type of purchase (e.g., home or car), so they are often more accessible to borrowers with bad credit or who want flexibility in using the money. That said, they may come with high interest rates and fees.
Because eligibility is based on whether you make enough money to afford the monthly payments, income-based loans may be the right choice if you need funds and have a steady income but a poor credit history. This guide outlines the pros, cons and eligibility requirements for income-based loans.
Loans that go by income, also known as income-based loans, are a type of financing that looks primarily at your income rather than your credit score when determining loan eligibility. With the traditional credit scoring model, people with little credit history or past credit issues can find it difficult to qualify for financing. Income-based loans provide an alternative solution.
In this comprehensive guide. we will cover everything you need to know about income-based loans including
- What are income-based loans?
- How do income-based loans work?
- Pros and cons of income-based loans
- Minimum income requirements
- How to apply for income-based loans
- Where to get income-based personal loans
- Alternatives to consider
- FAQs
Let’s get started!
What Are Income-Based Loans?
Income-based loans, also referred to as income-driven loans, are a type of financing where the lender focuses more on your income and ability to repay rather than your credit score.
With a traditional loan, the lender will pull your credit reports from the three major credit bureaus and primarily base their decision on your credit scores. If you have a short credit history or past credit issues like late payments, your credit score will likely be lower, making it more difficult to qualify.
Income-based lenders take a different approach. While they may still perform a soft credit check, more emphasis is placed on your current income and employment. If you can demonstrate you earn enough money to handle the loan payments, you may be approved even with bad credit or limited credit history.
How Do Income-Based Loans Work?
Income-based loans function similarly to traditional installment loans in many ways. Here are some key things to know about how they work:
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Application process – To apply, you’ll need to provide proof of your income in the form of pay stubs, bank statements, tax returns or other documentation. Self-employed individuals may need to provide additional documentation.
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Loan amount – The amount you can borrow will depend on your income. Loan amounts often range from $1,000 to $50,000 for income-based loans.
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Interest rates – Income-based loans frequently come with higher interest rates than conventional loans, often ranging from 10% to 36%. The higher rates help offset the increased risk of lending to borrowers with lower credit scores.
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Repayment terms – Loan terms are often shorter than traditional installment loans, usually 2-5 years. Shorter terms mean higher monthly payments.
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Monthly payments – Like other installment loans, you’ll make fixed monthly payments including interest over the loan term until it’s fully paid off.
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Unsecured vs secured – Income-based loans may be unsecured or secured. Secured loans require collateral like a car or home, which provides security to the lender if you were to default.
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Prepayment penalties – Most income-based loans allow you to pay off the balance early with no prepayment penalty.
Overall, the process is very similar to other personal installment loans. The key difference is the eligibility criteria focuses more heavily on your income rather than credit score.
Pros and Cons of Income-Based Loans
Income-based loans can provide financing options for those with limited credit histories, but they also come with some drawbacks. Here are some key pros and cons to consider:
Pros
- May approve borrowers with low credit scores or limited credit history
- Flexible qualification requirements beyond just credit score
- Still builds your credit if payments are made on time
- Useful for managing emergency expenses or consolidating debt
Cons
- Tend to come with higher interest rates
- Shorter repayment terms mean higher monthly payments
- Unsecured loans means no collateral for the lender
- Predatory lenders could trap borrowers in debt cycles
For borrowers with low credit scores, an income-based loan may be one of few financing options available. But it’s important to weigh the pros and cons for your specific situation before applying.
Minimum Income Requirements
Lenders typically set minimum income requirements borrowers must meet to qualify for an income-based loan. Each lender will have their own specific threshold, but minimums often fall in the range of:
- $20,000 – $30,000 per year for individuals
- $40,000 – $50,000 per year for households
The minimum also factors in your debt-to-income ratio, meaning your total monthly debt payments divided by your monthly gross income. Most lenders want this ratio to be 50% or less for approval.
Meeting minimum income requirements does not guarantee approval. The lender will still evaluate additional factors like employment history, outstanding debts, and collateral available if secured.
How to Apply for Income-Based Loans
The application process for income-based loans involves a few key steps:
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Determine your budget – Calculate your monthly income, expenses, and existing debts. This helps you determine what loan payment you can realistically afford.
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Check your credit – While income level carries more weight, most lenders will still perform a soft credit check. Reviewing your credit first helps set accurate expectations.
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Research lenders – Compare interest rates, loan minimum/maximum amounts, fees, and other terms from a few income-based lenders.
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Gather documentation – Have paystubs, tax returns, bank statements, and other income documentation ready to submit.
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Apply for prequalification – Submit a prequalification application to get an initial eligibility decision without a hard credit check.
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Submit official application – Provide all required information and documentation to apply for official loan approval and funding.
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Accept loan terms – If approved, you’ll receive loan terms to accept including rates, fees, repayment schedule, etc.
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Receive loan funds – After finalizing all paperwork, the lender will distribute your loan amount directly into your designated bank account.
Be sure to carefully read and understand all loan terms before accepting an income-based loan offer.
Where to Get Income-Based Personal Loans
Many national banks, credit unions and online lenders now offer income-based loan programs. Here are a few options to consider:
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Online lenders – LendingClub, Prosper, Upstart, and other prominent online lenders have income-based loan options in addition to their traditional credit score-driven loans.
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Banks and credit unions – Wells Fargo, Citi, and other large banks provide personal loans with flexible income requirements. Local banks and credit unions are another option.
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Peer-to-peer lending – Websites like Lending Club and Prosper connect individual investors with borrowers for more customized loan terms.
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Payday alternative loans – Offered by some credit unions, these small loans of $200 – $1,000 can help borrowers avoid high-cost payday loans.
Be sure to compare multiple income-based lenders to find the best rates and terms for your situation. Avoid predatory payday loans that can trap borrowers in debt cycles.
Alternatives to Income-Based Loans
Income-based loans provide one option for financing with bad credit, but here are a few other choices to consider:
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Traditional personal loans – Even with lower credit, it may be worth checking if you can qualify for a traditional installment loan at a more affordable rate.
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Credit union loans – Member-owned credit unions offer loans with more flexibility on credit requirements for their members.
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Credit-builder loans – These loans intentionally start with the lender holding the amount borrowed. As you make payments, the money is released to you and your credit improves.
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Credit cards – 0% APR introductory offers allow interest-free usage for a set period, usually 6-18 months depending on the card.
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Home equity loan/lines of credit – Taps into your home equity for a revolving credit line or lump-sum through home collateral.
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Auto title loans – These short-term loans use your car title as collateral, but come with sky-high interest rates.
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Payday loans – Extremely high-cost, short-term loans against your next paycheck. Should only be a very last resort option due to their predatory structure.
Consider both pros and cons when weighing income-based loans against other forms of financing. Non-traditional loans often come with fewer consumer protections.
FAQs about Income-Based Loans
Can I get a loan based on my income alone?
Yes, many lenders now offer loans based primarily on your income, requiring little or no credit history. Proof of income from paystubs, bank statements, or tax returns is needed.
How are income-based loans different from payday loans?
Income-based loans provide more affordable installment loan options for borrowers with lower credit. Payday loans charge excessively high fees for short 2-4 week terms, trapping many borrowers in vicious debt cycles. Income-based loans have longer 2-5 year terms with manageable fixed monthly payments.
Do all income-based loans have high interest
Eligibility for Income-Based Loans
Every lender can set its own eligibility requirements for income-based loans, so the exact qualification criteria usually vary between lenders. However, the basic idea is that a lender wants to make fairly sure that you can pay back the loan. Alternatively, lenders may accept collateral, which gives them another means to recover their money if you default on the loan.
As the name implies, the main eligibility criterion for income-based loans is your income. A lender may want to see that you have a steady income that’s high enough to reasonably make the loan payments (along with your other monthly expenses). You may have to provide bank statements and proof of your income (e.g., pay stubs, Social Security benefits or alimony checks). With a secured loan, the lender may consider the value of your collateral (e.g., home or car).
How To Apply for an Income-Based Loan
The process of applying for an income-based loan is similar to that of a traditional loan. You may be able to start by prequalifying or “checking rates” on a lender’s website. Doing so may allow you to compare potential offers so you know which lender you want to apply with. However, not all lenders offer income-based loans, so you may not have many options to compare.
During the application process, you’ll likely have to provide proof of your income or the value of your collateral. If you are applying with a cosigner or co-borrower, you will probably need to provide their personal and financial details as well. Once you submit your application, you’ll have to wait for the lender to approve it. Then, it usually takes a few more business days to get the money transferred to your checking account.
Once you decide which lender you want to move forward with, here are the basic steps for applying for an income-based loan:
- Gather documentation: Lenders typically require a photo I.D., proof of income (e.g., bank statements, pay stubs, child support agreement or proof of any non-work-related income), proof of address and your Social Security number. A lender may still do a soft inquiry for an income-based loan. If you’re applying for a secured loan, you’ll also need proof of ownership and the value of your collateral.
- Prequalify: See if you can prequalify with multiple lenders or check potential rates on their websites. Doing so can allow you to see whether you are likely to qualify for the income-based loan amount you want and what sort of terms you’re likely to get.
- Choose a lender: Select the best potential offer and complete the application process. Make sure to provide all the documentation along with your application.
- Complete the process: Be prepared to answer any follow-up questions or provide additional documentation if the lender requests it.
- Read your loan agreement: Once your loan is approved, read through all the terms so you understand the repayment process, interest rate, fees and prepayment penalties before you sign the paperwork.
- Set up autopay: After you close the loan, it’s a good idea to set up autopay so you don’t risk missing any payment deadlines.