At a Glance

For the majority of people who have applied for a loan in the past, you likely were applying for a conventional loan where the biggest factor in whether you were approved was your credit score. Fewer people are aware that there are other loan options available, though, which take different factors into consideration. One such option is an income-based loan, which is distinctly different form a conventional loan.

Learn everything you need to know about income-based loans in this article to determine whether applying for one is right for you.

In this article, you’ll learn:

What are income-based loans?

For those who have never heard the term, income based loans are those which take different factors into consideration than your credit score. While a soft pull on your credit may still occur, the primary factor in whether or not you are approved will be your income. Loans based on income can come with a number of hidden fees, though, which is why understanding how these loans work is important.

How do they work?

At their core, income-based loans are personal loans that can be used for whichever purpose a person deems fit. Income based personal loans work similar to traditional loans, though, in that a person is provided with a lump sum amount up front which they are responsible for paying back over time in monthly allotments.

Unlike traditional loans, however, online loans based on income don’t require any sort of credit inquiry during the application process strictly, though they will often still look at your history. Given that this is a more flexible approval process compared to traditional loans, it is likely that an income-based loan will come with extra fees due to a higher perceived risk on behalf of the lender.

Pros and cons of loan based on income

Naturally, a loan based off income may sound ideal to a person who might not qualify for a traditional loan at an affordable rate. However, as with anything, there are both pros and cons to consider to loans based on income.


Starting with some of the most notable benefits of using a loan based on income:

1. Can borrow with limited credit

The biggest benefit to taking out a loan based on income is the fact that you don’t need to have a high credit score in order to do so. By not needing to prove you have an adequate credit score, there are potentially more loan options to consider which can give a person the chance to consider different rates.

2. Can use for many purposes

Given that the majority of income-based loans are personal loans, this means they can be used for whichever purpose a person deems fit. This flexibility means that home renovation, medical expenses, or other necessary expenses can be taken care of with ease.

3. Flexible repayment

Income-based loans, despite their differences to traditional loans, are built on a similar structure. This means that a person can make monthly payments towards the loan in a reasonable manner, which makes these loans affordable.

4. Improve credit score

Finally, a major benefit to income-based loans is the fact that they can improve a person’s credit score over time, assuming all payments are made on time and in full, which can help a person borrow a traditional loan in the future.


For all of the above benefits, though, there are some notable drawbacks to taking out an income-based loan that must be considered:

1 High rate fees

Given that the lender will perceive slightly more risk from lending on an income-based loan, there are additional fees often applied to these loans. While the percentages are often small, they can add up to large amounts if the total amount borrowed for an income-based loan is quite high.

2. Might require collateral

The majority of income-based loans are unsecured and do not require collateral, but this is not a guarantee. In some cases, collateral may be required or, if your income level is lower, the lender may ask to see some form of collateral to approve you for the loan.

3. Predatory lender

Oftentimes, a person will jump at the opportunity to apply for a loan that has no credit requirements, but this opens the door to potentially falling victim to predatory lenders. In this situation, a lender will loan you money with so many fees and such a short repayment period that they make astronomical amounts of money which drive you further into debt.

4. Late payment can affect your score

Finally, while an income-based loan can benefit a person’s credit with positive repayment habits, it also has the potential to impact your score negatively. Assuming a person cannot repay their loan on time, their credit score will be damaged which can result in having trouble in the future when it comes to borrowing funds.

How to apply for a loan based on a paycheck?

With all of the pros and cons outlined, it’s time to finally look at how to apply for loans that go by income. This process can be completed in five easy steps:

1. Compare your option

First, a potential borrower needs to compare the different options on the table that they have. Look at different loan options offered by different lenders to determine if there is one which stands out to you as having the fewest fees and as the most affordable.

2. Prequalify

Once you have found a lender who offers a loan that is within your expectations, take the time to submit for prequalification if it’s available. This feature allows a borrower to typically see instantly whether or not they are prequalified to apply for the loan. While it is not a guarantee of approval, it is a strong indicator of what will happen to a person’s application.

3. Submit your application

After prequalifying if you are able, it’s time to actually submit the application for loans based on income only. Gather all necessary personal and financial information you may need, such as pay stubs, your SSN, your identification, your address, and more. Most lenders allow for online applications through a secure portal where you will input all of the necessary aforementioned information.

4. You will receive your funds

Assuming you are approved for the loans based on your paycheck, the lender will fund the loan either instantly or within a few days (depending if more information is needed from your application). Once you have the funds in your possession, you may use the loan for whatever purpose you wish.

5. Start paying

Finally, with the money on hand and your purposes met, it will be time to start paying back the loan in monthly installments.

Alternatives to income-based loans

For some people, an income-based loan may not be the right choice. Whether they have an adequate credit score to apply for a traditional loan or simply don’t feel like borrowing from a lender, there are other options to consider for acquiring funds:

1. Traditional loans

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First and foremost, those who have an issue with the higher fees of income-based loans and who have a credit score at least above 620 at a minimum could consider applying for a standard personal loan. This will work exactly the same way as an income-based loan and, in most cases, will be unsecured with an interest rate between 6%-36%, though closer to 6% with a strong credit score.

2. Credit cards

For smaller, yet still necessary, expenses, consider using credit cards that allow you to dip into your credit. If you have a rewards credit card, consider using that option so that you at least get points or dollars back on your purchase.

Compare: Best Credit Cards

3. Loans from friends or family

Assuming you have friends or family who are willing to help, consider reaching out to them and explaining the situation, as well as why you need the money. In most instances, they will be understanding if this is your first time asking for help.

Learn more: Family Loans

4. Home equity loan

Those who have purchased a home can consider taking out a specialty loan that is valued based on the existing equity you have in your home. However, it’s worth noting that this is riskier due to the fact that your collateral is that equity.

Learn more: How Does a Home Equity Loan Work?

5. Credit union

Turning to a credit union can sometimes help those with a slightly better credit score than the standard person applying for an income-based loan, yet still not strong enough for a standard loan from a traditional bank lender.

Learn more: Credit union personal loans

How to build credit using loans based on income?

Naturally, a person may wonder how they can actually use an income-based loan to their benefit in order to bolster their credit score. There are two primary ways to go about this:

1. Pay on time

First, simply making all payments on time and in full will slowly start to increase your credit score over time as the payments will be reported to the credit bureaus. Set a reminder every month for when the payment is due and be sure to pay it at that time to avoid late payment fees and potential hits to your credit score.

2. Another form of credit

The fact that an income-based loan is a different type of credit will, in and of itself, bolster your credit score. The credit mix a person has is one of the factors used to calculate credit score, and having a loan in addition to credit cards, a mortgage, or other types of debt will help your score.


The primary way in which income-based loans differ from traditional loans is that income-based loans don’t require a certain credit score for the application process. While credit will still be looked at, the biggest factor in the approval process is a person’s income level.

Standard personal loans can be used for any purpose, just as income-based loans, but they are almost always unsecured and look at a person’s credit score during the approval process. In contrast, income-based loans may require collateral in some instances and credit requirements are not typically stated.

No, a person’s income is not one of the factors used by the credit bureaus to evaluate a credit score, meaning a high income will not increase a credit score.

Yes, income-based loans are alternatives to standard personal loans which take a person’s income as the largest factor in the approval process, as opposed to a credit score.

Whether or not origination fees exist on income-based loans depends entirely on the lender offering the loan, but they certainly can.