Income-Based Loans: All You Need To Know
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.
Pros
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.
Cons
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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