What Are Income-Based Loans?

With nearly a decade covering personal finance, Rebecca Safier simplifies loans and other complex financial topics to help people manage their money with confidence. Her work has been featured in Forbes Advisor, Buy Side from WSJ, U.S. News & Wor.

With nearly a decade covering personal finance, Rebecca Safier simplifies loans and other complex financial topics to help people manage their money with confidence. Her work has been featured in Forbes Advisor, Buy Side from WSJ, U.S. News & Wor.

With nearly a decade covering personal finance, Rebecca Safier simplifies loans and other complex financial topics to help people manage their money with confidence. Her work has been featured in Forbes Advisor, Buy Side from WSJ, U.S. News & Wor.

With nearly a decade covering personal finance, Rebecca Safier simplifies loans and other complex financial topics to help people manage their money with confidence. Her work has been featured in Forbes Advisor, Buy Side from WSJ, U.S. News & Wor.

Colin Beresford is a writer and editor experienced in helping people make the best decisions with their money, whether it's buying a car or taking on a loan. He has written for Bloomberg, The Associated Press, NerdWallet, Car and Driver magazine, amo.

Colin Beresford is a writer and editor experienced in helping people make the best decisions with their money, whether it's buying a car or taking on a loan. He has written for Bloomberg, The Associated Press, NerdWallet, Car and Driver magazine, amo.

Colin Beresford is a writer and editor experienced in helping people make the best decisions with their money, whether it's buying a car or taking on a loan. He has written for Bloomberg, The Associated Press, NerdWallet, Car and Driver magazine, amo.

Colin Beresford is a writer and editor experienced in helping people make the best decisions with their money, whether it's buying a car or taking on a loan. He has written for Bloomberg, The Associated Press, NerdWallet, Car and Driver magazine, amo.

| Deputy Editor, Personal and Business Loans

Updated: May 4, 2023, 1:29pm

Editorial Note: We earn a commission from partner links on Forbes Advisor. Commissions do not affect our editors' opinions or evaluations.

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An income-based loan is a personal loan that places more emphasis on your income rather than credit score to determine your ability to repay a loan. If you have poor credit and a reliable income, an income-based loan could be a good option for you.

Keep in mind that this sort of loan can come with high interest rates and fees, so consider all of your options before seeking one out.

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.

Unlike a traditional personal loan, income-based loans often don’t have a strict credit requirement. Instead, lenders look closely at your income to determine if you can make all of the payments on your loan. Because of that, these loans may be a good option for borrowers with limited or weak credit.

Be aware of lenders that don’t require any sort of credit inquiry; that can be a sign of a personal loan scam. If a lender guarantees approval, pressures you into the loan or doesn’t disclose fees, those can also be signs of a scam.

The flexible qualification standards for an income-based loan can come with higher interest rates and fees compared to other personal loans. Some lenders may offer income-based loans as secured loans, which require collateral, such as your car or home, to back up the loan. If you miss payments on a secured loan, the lender can then take ownership of your collateral.

Not all income-based loans are secured, but an unsecured income-based loan may come with higher interest rates. Before borrowing, consider all of your options and use a loan calculator to estimate your monthly payments and long-term interest costs. Make sure you’ll be able to afford your repayment obligations before you sign your loan agreement.

How To Apply for an Income-based Loan

The application process for an income-based loan will vary by lender, but you’ll generally take these steps:

1. Compare your options. Not all lenders offer income-based loans, so you’ll need to compare your personal loan options. Compare lender’s qualification requirements, loan limits, loan terms, annual percentage rates (APRs), among other loan features to find the option that best works for you.
2. Prequalify for a loan. Some lenders let you check your rates with no impact on your credit score. This option to prequalify can make it easy to compare offers from multiple lenders before accepting a loan offer.
3. Submit an application. If you find a loan provider that seems like a good fit, you’ll submit a complete application. The application will ask for your personal and financial details, and you’ll likely need to provide proof of income, such as pay stubs, bank statements or tax returns.
4. Receive your funds. Once your loan is approved, the lender typically deposits the proceeds directly into your bank account.
5. Start repaying your loan. Read over your agreement to find out when your first payment is due. Some lenders offer a discount on your interest rate if you set up automatic loan payments.

Where To Get Income-based Loans

Various financial institutions offer income-based personal loans, including:

• Online lenders. Some online lenders specialize in income-based loans for borrowers with limited or bad credit.
• Credit unions. Credit unions tend to have more flexible borrowing requirements than other lenders and may be willing to offer a loan based on income, rather than credit. However, most credit unions require you to become a member.
• Banks. Traditional banks may provide income-based loans that you can apply for online or at your local branch.
• Peer-to-peer lenders. Peer-to-peer lending platforms connect you with individual investors who may be willing to fund your loan.

It’s also worth checking with your current bank or credit union to see if it can provide you with a loan. Some institutions have special offers for current customers who they already have an existing relationship with.

Pros and Cons of Income-based Loans

There are both pros and cons to income-based loans that are worth considering before you accept a loan.

Pros

• Accessible to borrowers with limited credit. Since lenders primarily rely on your income when deciding whether to fund an income-based loan, you typically don’t need good or excellent credit to qualify.
• Can be used for a variety of purposes. Income-based loans can be used for a variety of reasons, including debt consolidation, home improvement, medical bills and other expenses.
• Flexible repayment terms. You may have several months or years to pay back your income-based loan. A longer term can make your monthly payments more affordable, but keep in mind that it may lead to higher interest charges in the long run.
• Can improve your credit score. If you make reliable and on-time payments, you could see your score improve over time.

Cons

• May come with high rates and fees. Since income-based loans are designed for borrowers with bad credit, they may have higher interest rates and fees than traditional unsecured loans for consumers with good credit.
• Some loans require collateral. Depending on the lender, you may have to back your loan up with an asset. While secured loans have more flexible qualification requirements than unsecured ones, you risk losing your collateral if you fall behind on payments.
• May come across predatory lenders. There are plenty of predatory loan companies offering loans with no credit checks. Be careful of loans that don’t clearly disclose rates and fees or come with unreasonable charges tacked on to your loan amount.
• Late payments can damage your score. If you miss payments on your income-based loan, you could damage your credit score. A low credit score will make it even harder to qualify for credit in the future.

Income-based Loan Alternatives

If you need funding, an income-based loan may not be your only option. Here are some alternative financing options to consider:

• Traditional personal loan. It may be worth checking whether you can qualify for a traditional personal loan, even if your credit isn’t perfect. Some lenders use alternative lending models to make their credit decisions rather than considering only your credit score.
• Credit cards. Charging your expense to a credit card is an option, but be careful of high interest charges. Some credit cards offer a 0% introductory APR offer, but you may need good credit to qualify. If you pay off your balance before the introductory period ends, you won’t have to pay interest on the amount.
• Home equity loan or line of credit. If you’re a homeowner, you might be able to tap into your home’s equity with a home equity loan or line of credit. Keep in mind that both of these loan types are secured by your home, so you risk foreclosure if you can’t afford to pay back the debt.
• Friend or family loan. If you have someone in your life willing to lend you money, you may take them up on their offer. It’s worth drafting up an agreement so you’re both on the same page about repayment expectations, including when payments are due and any interest attached to the loan.

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