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An income-based loan might be an option if you have limited or less-than-great credit.
Have you ever needed money for an emergency? While everyone has to deal with financial emergencies sometimes, not everyone has access to quick cash or credit.
That’s where an income-based loan (which is really just a personal loan) could help. Some lenders could be using the term “income-based loan” to indicate they might be willing to extend personal loans to people who have little-to-no credit history but who show they have the income and ability to repay the loan.
If your credit isn’t great or you don’t have much of a credit history, getting a personal loan from a traditional bank can be more difficult because they often have stricter lending standards. But some lenders are more willing to look at your income and ability to repay when considering you for a personal loan.
The downside to a personal loan that’s based on income? Interest rates can be dangerously high in some cases. But if you use an income-based loan to help build your credit, you may be able to get better terms in the future.
Here’s what you need to know to help make the best decision for your circ*mstances.
Looking for a loan?Shop for Personal Loans Now
How do income-based loans work?
Lenders will use different criteria and methods to determine if you’re eligible for an income-based loan (which again, is really just a personal loan). Some lenders perform a soft credit inquiry before offering you a loan while others won’t pull your credit history at all.
Note that it’s common for predatory lenders to offers loans without any credit inquiry at all. Watch out for this type of loan: It may have high interest rates and fees.
Payday loan lenders may not pull your credit, but they may require you to verify your income and bank account information. Because of the high fees that come with payday loans, it’s possible to get stuck in a debt trap.
Understanding secured vs. unsecured loans
Since income-based loans are personal loans, they can be either unsecured or secured loans.
When you get a secured loan, you offer a piece of property, like your car or home, to the lender as collateral for the loan. If you fail to repay the loan as agreed, the lender may be able to take the collateral to try to recover any unpaid amount.
On the other hand, an unsecured loan does not require you to put up any collateral, so it’s generally considered less risky to the borrower. But you’ll generally pay a higher interest rate because the lender faces a higher risk.
How can I apply for an income-based loan?
Even if your credit history is rough, you may be able to find a lender that weighs your income more heavily when deciding whether to issue a personal loan. But you’ll want to do your homework before making a decision.
Keep an eye out for this information as part of your loan application and loan terms.
- Income verification: Lenders will typically verify your income so they can gauge how much you’re capable of repaying.
- Loan amount: The amount you qualify for will depend on your income and credit history.
- Loan term: Your loan term will typically range from six months to 60 months. Keep in mind that the longer the term, the more you’ll pay in interest. Although you’ll have higher monthly payments, you could save money with a shorter loan term.
- APR: Personal loan APRs often range from 5% to 36% or more, but payday loans can have much higher APRs — even in the triple digits. This can include not just the interest rate on the loan but also any fees that you may pay.
- Account information: Lenders may also often ask for your bank account details to verify your financial information.
- Restrictions: Lenders may not offer their loans in some states.
How to use income-based loans to build your credit
If you get a personal loan it can help you build your credit if you use it responsibly. If you can raise your credit you may be able to qualify for better financial terms in the future.
Here are some ways you can use an income-based loan to improve your credit health.
- Making your payments on time: Make sure your lender is reporting your on-time payments to the three major consumer credit bureaus — this is one of the most important factors that affects your credit scores.
- Getting another form of credit: Getting a personal loan might add a new type of credit to your credit reports. Your credit mix — which considers different types of credit such as installment loans, credit cards and mortgages — is a factor in your credit scores, though not one of the most crucial.
Bottom line
An income-based loan can be a useful tool if you need money quickly and your credit isn’t great. Be sure to look into all the terms before choosing a lender — and if you’re able to use the loan to build your credit, you may be able to get better options in the future.
Looking for a loan?Shop for Personal Loans Now
About the author: Poonkulali Thangavelu has 20+ years of financial journalism experience. Her work has appeared with outlets like Bankrate, Investopedia and various national newspapers. Poonkulali holds an MBA in finance and marketing … Read more.
FAQs
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.
How do income-based loans work? ›
Income-based loans are personal loans that you can use for almost any purpose, including debt consolidation and home improvement. You'll typically receive an income-based loan in a lump sum upfront, which you'll then repay in monthly payments over the loan's term, or the set repayment period.
What are the rules for income-based repayment? ›
Income-based repayment caps monthly payments at 15% of your monthly discretionary income, where discretionary income is the difference between adjusted gross income (AGI) and 150% of the federal poverty line that corresponds to your family size and the state in which you reside. There is no minimum monthly payment.
How do I self certify my income for student loans? ›
You can self-certify your income over the phone with your servicer or through an online application by submitting a document that states your income. A self-drafted document will work if that's what you have. Most people can complete the online application in 10 minutes or less.
Why am I not eligible for income-based repayment? ›
Generally, your federal student loan debt has to exceed your annual discretionary income or it has to make up a significant portion of your annual household income. Parent borrowers aren't eligible. Parent PLUS Loan borrowers aren't eligible for IBR, even if they consolidate with a direct consolidation loan first.
Do I need proof of income to get a loan? ›
Key takeaways. When applying for a personal loan, you must provide personal and financial information, including proof of identity, income and address. Lenders generally request information about your credit score, loan purpose and monthly expenses to determine your eligibility and loan terms.
How much money can you borrow based on income? ›
The 28%/36% Rule
According to this rule, a maximum of 28% of one's gross monthly income should be spent on housing expenses and no more than 36% on total debt service (including housing and other debt such as car loans and credit cards). Lenders often use this rule to assess whether to extend credit to borrowers.
What is proof of income for income based repayment? ›
Alternatively, you can provide documentation, such as your most recent tax return. If you didn't file taxes, other acceptable income information can include pay stubs or a letter from your employer. After you submit your application, it will be processed over the next few weeks.
What is one disadvantage of the income based repayment plan? ›
Cons of income-driven repayment plans
You might pay more interest with IDR: Smaller payments are great for your budget, but you could end up spending more interest over the life of your loan. That's because you'll be accruing and paying interest for an additional 10 to 15 years.
How much is the monthly payment on a $70,000 student loan? ›
What is the monthly payment on a $70,000 student loan? The monthly payment on a $70,000 student loan ranges from $742 to $6,285, depending on the APR and how long the loan lasts. For example, if you take out a $70,000 student loan and pay it back in 10 years at an APR of 5%, your monthly payment will be $742.
Here are 13 forms of proof of income home buyers may need to provide during the home loan approval process.
- Paystubs. ...
- Proof of income letter. ...
- Last year's tax return. ...
- Social Security proof of income letter. ...
- Annuity statement. ...
- Pension distribution statement. ...
- Court-ordered agreements. ...
- 1099 statement for self-employed.
Your servicer will notify you when your request has been processed. Processing typically takes about 30 days from the date you submit the request. Please note we're experiencing processing delays based on volume.
Can you list student loans as income? ›
Student loans don't count as income, but borrowers could owe on portions of scholarships and grants. Student loans are not taxable income, but be aware that other types of aid are treated differently. Many students borrow money or accept grants and scholarships to help pay for higher education.
What is the minimum income for income-based repayment? ›
You monthly payment will be 0$ if your AGI is less than 150% of the federal government's established poverty line of $12,880 in 2021. That means your income would have to be under $19,320.
Who qualifies for IDR forgiveness? ›
Less than 25 years of payments if you borrowed any loans for graduate school and you borrowed less than $26,000 in principal, 25 years of payments if any of the loans you're repaying in the plan were for graduate school and you borrowed more than $26,000 in principal.
What is the best student loan repayment option? ›
Best repayment option: standard repayment. On the standard student loan repayment plan, you make equal monthly payments for 10 years. If you can afford the standard plan, you'll pay less in interest and pay off your loans faster than you would on other federal repayment plans.
Is income-based repayment a good idea? ›
Switching to an income-driven repayment plan won't directly affect your credit score. But, a lowered monthly payment will lower your debt-to-income ratio. That can be good for your credit. On the other hand, you will get an extended loan term, so you'll have the debt for longer.
How much will I pay on an income-based repayment? ›
For the IBR Plan, your monthly payment amount is 10% of your discretionary income if you're a new borrower on or after July 1, 2014. If you're not a new borrower, your monthly payment amount under the IBR Plan is 15% of your discretionary income.
How do loan providers verify income? ›
Mortgage lenders verify employment by contacting employers directly and requesting income information and related documentation. Most lenders only require verbal confirmation, but some will seek email or fax verification. Lenders can verify self-employment income by obtaining tax return transcripts from the IRS.
Can I get a loan based on my income alone? ›
An income-based loan is a type of personal loan, which can be used for debt consolidation and a variety of expenses and purchases. Most personal loans are unsecured and approved based on your credit score, but with income-based loans, lenders instead prioritize how much money you make.
