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Income-Based Loans: How They Work And If They’re Right For You

Victoria Araj8-minute read
UPDATED: December 19, 2023

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With income-based loans, lenders determine your approval by focusing more on your income or employment status than your credit history. These types of loans can be a good option for borrowers who have a steady stream of income but a poor credit score. Interest rates tend to be elevated with income-based loans, though, which likely means higher monthly payments. It’s important, therefore, to understand what you’ll be getting into before applying.

Below, we’ll unpack how income-based loans work and explore your options.

How Loans Based On Income Work

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.

Most lenders will still perform a soft credit check as initial approval, however, and it’s important to beware of lenders who skip this part of the process.

Income-based loans tend to come with high-interest rates and fees that help reassure a lender they’ll recoup their money even if a borrower defaults on the loan. Some lenders go as far as to offer income-based loans as secured loans, where the borrower puts forward collateral to guarantee the lender repayment.

Minimum income requirements vary among lenders, but borrowers are generally required to earn an annual income of at least $35,000 to qualify.

Secured Vs. Unsecured Loans

An income-based loan can come as either a secured or unsecured loan. Unsecured loans require no collateral but may have a higher interest rate attached to them. Your typical personal loan won’t require collateral, even if approved based on your income. If you can make your monthly payments, you’ll be risking less by taking on the loan.

Going with a secured loan may save you in interest, but you risk losing your collateral. If you default, your lender will take your collateral and sell it to reclaim the loan amount they let you borrow.

Pros And Cons Of Income-Based Loans

While the option for an income-based loan is there for borrowers with low or “bad” credit, make sure you know all the benefits and drawbacks of income-based loans.

Pros

Cons

Borrowers with low credit can qualify for loans.

Income-based loans may charge higher interest rates and origination fees, or require collateral.

Lenders may offer flexible repayment plans for income-based borrowers.

Missed payments can lower your credit score.

You can build up your credit by paying back your loan.

Borrowing from predatory lenders can trap you in a cycle of debt.

How To Apply For An Income-Based Loan

Applying for an income-based loan can differ depending on the lender but will generally be similar to getting a personal loan. The process will typically follow these steps:

1. Calculate your income. Determine how much you earn on a monthly basis and calculate your debt-to-income ratio (DTI) so you know what you can reasonably afford. You may also want to check your credit score just to see your eligibility for a traditional loan.

2. Shop around different lenders. Lenders will all differ in requirements, interest and fees, so make sure you check with a few lenders before proceeding with your application. You’ll want to go with the one who offers you the best rates and repayment terms.

3. Get prequalified. Getting prequalified can give you an estimate of what loan amount, rates and terms you qualify for, and what your monthly payment might be. Prequalification usually involves only a soft credit check, which doesn’t hurt your credit.

4. Apply for the loan. Once you’ve found a lender with the most favorable loan terms, fill out and submit a full loan application with all of the required documents. With income-based loans especially, be sure to have valid proof of income.

5. Wait for an approval. Once you’ve submitted everything, you should hear back within a few business days about whether you’re approved.

6. Receive your funds. Upon loan approval, you’ll receive your loan amount in a lump sum that’s usually deposited right into your bank account.

7. Begin the loan repayment process. You’ll typically begin making your monthly payments 30 days after receiving the loan and continue doing so for the rest of your loan term.

Where To Get Income-Based Personal Loans

Income-based personal loans can be available through traditional sources, such as banks, credit unions and online lenders. You can also receive an income-based loan through peer-to-peer lending, where loan terms may be more flexible.

Avoid predatory loans like payday loans, which are often approved based on your income and no credit check. Payday lenders can charge exuberant lending fees and rates as high as 400%. With a short repayment period of 2 weeks, you may have to roll over the loan for an additional fee, setting yourself up for a cycle of debt.

If you want to expand your loan options, take steps to improve your credit score.

Getting a personal loan has never been easier.

The Rocket LoansSM application process makes borrowing simple.

Alternatives To Income-Based Loans

If a loan based on income won’t work for your situation, perhaps consider one of the alternative loan options described next.

Traditional Personal Loans

Even if you have a low credit score, it doesn’t hurt to find out whether you’d qualify with a lender the old-fashioned way. Borrowers can still secure a good interest rate and term with a credit score of 650, and it’s possible to get approved with a score as low as 610. Borrowers with good or excellent credit can qualify for a lower interest rate.

To understand your creditworthiness, check your credit score before you pursue any loan options.

0% APR Credit Cards

Using your credit card can cause you to incur high interest charges, but some card companies offer a 0% APR (annual percentage rate) introductory period when you sign up for a new card. For 6 – 21 months, you could put interest-free charges on your new card. If you don’t repay the full balance within that time period, though, you could get hit with a credit card interest rate of nearly 25%.

Home Equity Loans Or HELOCs

A home equity loan allows you to use the equity in your home to secure financing. With your home being used as collateral, though, you risk losing your house through foreclosure if you fall behind on your payments.

A home equity line of credit (HELOC) works much the same way, only as revolving credit that you take from and repay as you go.

Family Loans

A family loan is a more informal loan between family members that can be flexible with credit requirements, since you’ll typically know the lender personally. Family loans should still involve a contract, though, to ensure that borrowers stick to an agreed-upon repayment schedule. Defaulting or falling behind on payments could seriously affect a family relationship.

FAQs About Income-Based Loans

Still have questions about income-based loans? Take a look at these frequently asked questions and see if we’ve answered any of yours. 

Can I get a loan based on my income alone?

Yes, some lenders approve loans for borrowers who have little or no credit history. You’ll be expected to provide proof of your income in the forms of pay stubs, bank statements, tax returns and employer information. Self-employed applicants may have to provide additional proof in the form of profit and loss statements and any benefits statements.

Do banks give loans based on income?

Yes, traditional banks may lend out installment loans based on income, particularly if you’re a longtime client. Visit or call your local branch to discuss your income-based options.

How can I get a loan with no job or income?

If you don’t have a job, lenders may consider other forms of income, including:

  • Unemployment benefits
  • Retirement funds and pensions
  • Social Security
  • Disability benefits
  • Alimony and child support
  • Interest and dividend payments
  • Passive income in various forms

If you have enough money regularly coming in, you could possibly qualify for an income-based loan.

Final Thoughts

If you have a low credit score, a steady income could be enough to qualify you for a loan. Shop around to find the right lender like you would with a traditional loan, making sure you have valid proof of income. Be prepared to face a potentially high interest rate or the possibility of needing collateral for the loan.

Interested in a traditional personal loan? Fill out an application today to begin the process with Rocket Loans℠.

Personal Loans Any Time, Any Place.

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Victoria Araj

Victoria Araj is a Section Editor for Rocket Mortgage and held roles in mortgage banking, public relations and more in her 15+ years with the company. She holds a bachelor’s degree in journalism with an emphasis in political science from Michigan State University, and a master’s degree in public administration from the University of Michigan.