Income-Based Loans: Are They Right for You?

Tara Seboldt
Apr 15, 2022

Finding the cash to cover an emergency expense is stressful, especially if you’re dealing with bad credit.

Many lenders rely on your credit score to determine loan eligibility. This can make it difficult to find an emergency loan.

Income-based loans, on the other hand, look at your gross income to approve you for a loan.

Find out more about how these loans work and whether they’re a good idea for you.

What is an Income-Based Loan?

An income-based loan is a personal loan that uses the borrower’s income to determine eligibility.

Lenders who offer these loans generally don’t check your credit. They want to know that you have a steady income to repay the loan, regardless of your credit history.

This type of loan can be a good fit for a borrower with a low credit score or limited credit history.

It gives them a chance to improve their credit score by making on-time payments, which are an important part of your credit score.

A higher score often opens up more opportunities for credit with better loan terms, like a lower interest rate.

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How to Get an Income-Based Loan

Finding the right lender is the first step to getting a loan based on income.

Many traditional lenders, such as banks or credit unions, won’t offer this type of loan.

You may have to look for a direct loan from other loan servicers, such as online lenders.

What to Avoid: Predatory Lenders

Not all lenders are created equal. Legitimate online lenders provide loans with reasonable interest rates and affordable fees.

However, some lenders use predatory practices to lure you into a loan with outrageous interest rates and high fees, such as origination fees.

The most common type of predatory loan is a payday loan. The repayment term is only a few weeks after you take out the loan—usually on the day of your next paycheck.

Payday loans often trap borrowers into a cycle of debt, where lenders usually let you roll your existing loan into a new loan if you can’t repay it on time. This includes more fees and more interest costs.

Shopping for a Loan

You can avoid predatory lenders by shopping around for a loan before committing. Take the time to carefully read the loan terms so you know you’re getting a loan that works for you.

Once you find a lender, you’ll need to apply for the loan. Most income-based lenders will ask for a handful of documents to help verify your information, such as:

  • Proof of income, like a pay stub
  • Government-issued photo ID to verify your identity
  • Bank account information and activity within the last three months

Do Income-Based Loans Check Your Credit?

Many income-based lenders still check your credit when you apply for a loan. However, they’ll make their decision on your income—not your credit score.

It’s common for lenders to use a “soft pull” inquiry to help verify your identity and prevent fraud. Not to worry though; a soft pull doesn’t affect your credit score.

So, while your lender will look at your credit report to verify your identity, you can still get an income-based loan with no credit check.

Is Repayment Based on Income?

No, your loan repayment is almost always based on the terms of your loan. Your original loan balance, interest rate, and the length of your loan determine your monthly payment.

Some lenders may still work with you to help you repay your loan.

Possible Finance, for example, lets you apply for up to a $500 installment loan based on your income.

You’ll repay your loan in monthly payments with a fixed payment amount. If something comes up, you can reschedule your payment date for up to 29 days after the original payment date.

You may also qualify for flexible repayment plans if you can’t keep up with your payments.

Be sure to contact your lender’s customer service to find out what repayment options are available.

Remember, on-time payments are essential to help improve your credit score. Be honest and open when your lender could help you avoid a missed or late payment.

Federal Student Loans: Income-Based Repayment Loans

While personal loans don’t usually allow income-based repayments, one type of loan does—federal student loans.

Federal loans let low-income borrowers adjust their repayment plan to fit their current income.

Forbearance and deferment programs could also be available, which let you temporarily stop making payments on your loans.

However, you may still accrue interest even if you’re not required to make payments.

How does this help if you need cash fast?

Student loan debt is a large expense for many Americans—around 45 million.

While federal student loan repayment plans may not give you access to money for an emergency expense, they could lower your student loan payments.

This could open up more room in your monthly budget to put toward emergency savings.

Pros and Cons of Loans Based on Income

Everyone’s financial situation is different. You can help decide if an income-based loan is right for you by weighing the pros and cons.

Pros

  • Fast cash: Depending on your lender, you should be able to get cash in less than a business day. With Possible Finance, eligible borrowers can access their loans in minutes.
  • Improved credit score: A personal loan is a good way to improve your credit score by making on-time payments.
  • Payday loan alternative: Income-based personal loans are a good alternative to payday loans. Most are offered in small loan amounts with an affordable monthly payment amount.

Cons

  • Higher interest rates: Income-based loans often have higher interest rates than traditional, credit-based loans. However, they can be a good starting point to build your credit. As your credit improves, you may qualify for loans or credit cards with lower interest rates.
  • Could hurt credit score: If you can’t keep up with your loan payments, you could hurt your credit score. Make sure you can afford the monthly payment for a loan before you sign up.
  • Predatory lenders: Payday and other predatory lenders offer loans that could lock you into a cycle of debt. It’s important to research lenders before committing to a loan by reading reviews and carefully reviewing loan terms.

Conclusion

An income-based loan could help you get the cash you need in an emergency while building your credit score.

Making on-time payments to your loan can help you improve your credit history, giving you access to better loan terms in the future.

Be sure to shop around before choosing a loan to find one that best fits your financial situation.

Tara Seboldt

Tara is a financial writer with over five years of professional writing experience. She previously worked at a financial planning firm. Tara uses this professional experience to help readers better understand their finances and make smart financial moves. When she’s not writing about money, Tara enjoys spending time in the Idaho mountains hiking, camping, and skiing.

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