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What Are Loans Based on Income?

By Anna Davies · July 14, 2022 · 5 minute read

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What Are Loans Based on Income?

There are many different types of loans. And when you need money quickly, it can be challenging to assess the pros and cons of different options. It can also be challenging to assess which loans are right for you if you’re still building credit.

Many loans require a credit check, and your credit score may affect the interest rate and terms you are able to qualify for when borrowing a loan. But what if you have no credit or bad credit? There may be other loans available outside of personal loans from banks. Income-based loans, which evaluate your income as a primary deciding factor, may be an option to consider. These loans could give you the cash you need but may have considerations. Here is what to know about loans based on income.

Recommended: 11 Types of Personal Loans & Their Differences

How Does a Loan Based on Income Work?

Personal loans can be used to pay for nearly any expense. In addition to the flexibility for use of funds, other advantages of personal loans include convenience, competitive rates, and quick turnaround times. Though lenders often evaluate an applicant’s credit history in order to make lending decisions.

Loans based on income are also called income-based loans. Instead of focusing on an applicant’s credit score and history, like many personal loan applications, these loans may factor your income into account. While “income-based loans” and “loans based on income” are terms you may see when researching personal loans, these are primarily marketing terms. The companies who use these may be using income as a method of evaluating loan applications, making them an option for borrowers looking for no credit check loans.

A loan based on income depends upon the terms of the loan. Often, the lender may ask for proof of income, which may be a W-2 or paystub. You’ll need to share personal information on the loan application, such as your address and social security number. But unlike a traditional personal loan, the evaluation may not include a credit check.

Because the lender isn’t considering credit, the terms of the loan may be different from a traditional personal loan from the bank. For example, the loan may have a very high interest rate or require collateral. Collateral is when you, as a borrower, put up something tangible to back the loan in case you were unable to pay back the loan. This might be something like your car or even your house.

Whether a loan requires collateral determines whether it is a secured or unsecured loan. Both options may be part of an income-based personal loan.

Recommended: Using Collateral on a Personal Loan

Secured Loan

A secured loan is a loan that requires the borrower to put up collateral. These loans can take several forms:

Pawn loan. A pawn shop loan is where you put an item of value up as collateral, such as jewelry or electronics, in exchange for the loan. In addition to collateral, you’ll also have to pay the loan back with interest. If you are unable to do so, the pawn shop will then own the collateral and may sell it. Pawn loans can also be an option for those looking for no bank account loans.

Title loan. If you own your vehicle, you may be able to take out a loan for the valued amount of your car. In a title loan, you physically keep possession of your car, but the lender can hold the title of your vehicle. Interest rates for this type of loan can be very high — up to an APR equivalent of 300% — and can be risky. After all, if your income depends on your ability to drive to work, losing ownership of your car may mean that your ability to work is in jeopardy, too.

Home equity loan. If you own your home, you can borrow against the value of your home’s equity through different types of loans, including cash-out refinance, a home equity line of credit (HELOC) or a fixed-rate home equity loan. These types of loans can require a relatively lengthy approval process, and may not be appropriate if you need cash quickly, or if you need a relatively small loan.

Unsecured loan?

An unsecured loan does not require collateral. For this reason, this type of loan can feel “riskier” to the lender. If you do not pay back the loan, the process to get back their money will take a long time, involve the legal system, and may be fruitless if you declare bankruptcy.

That’s why lenders may require a more extensive application, including performing a credit check on the potential borrower. If you, as a borrower, know that your credit history is limited or you are still building your credit, you may have fewer personal loan options, especially when it comes to unsecured loans.

Still, there may be some available. Knowing the pros and cons, reading the fine print, and having a clear plan for how to pay back the loan can be important in assessing which one is the right one for you.

Payday Loans

One common type of loan that might be accessible for people with no or bad credit is a payday loan. This is usually a short-term, high-cost loan that is due on your next payday. Typically, payday loans are relatively small (generally under $500) and some states may have a limit as to how much people can borrow.

Payday loans are, like their name, due on your next payday or when you next get income. A payday loan typically has a relatively high-interest rate or fees as well. To ensure your loan is paid back, the lender may ask for a postdated check or money order. One of the problems with payday loans is that they can lead to a cycle of borrowing. While you have cash in hand, how will you make sure you can pay back the payday loan and cover expenses?

Recommended: Payday Loans, Explained – How Do They Work?

Alternatives to Loans Based on Income

If you need money quickly, you may have more options available. These could include:

Using a credit card or credit line. If you have access to credit, utilizing a credit card or credit line could help you through a rough financial patch. But because interest rates can be high, having a plan to pay back what you borrowed or taking advantage of a card with a low APR could be an option to consider.

Borrowing from friends or family. Sometimes, a loan from a friend or family member can be more flexible than borrowing from a lender. It can be a good idea to consider drafting an agreement, even if it’s relatively informal, regarding expectations, any interest agreements, and other conditions.

Selling things. Selling things you may not need may help you raise cash quickly. Using local online marketplaces can be a quick way to unload things you’re not using and raise money.

Starting a side hustle. While it can take time to onboard onto a new job, applying for part-time jobs could be a potential long-term strategy to access more money. In the short-term, informal jobs such as babysitting, tutoring, or other work could help you raise the cash you need.

Recommended: Family Loans: Borrowing From & Lending to Family

The Takeaway

Finding yourself in a financial lurch can be scary. But taking the time to weigh pros and cons of options may be helpful in choosing a sustainable path forward. Understanding the benefits and risks of loans based on income can help you assess whether this type of loan makes sense for your current financial circumstances.

SoFi offers personal loans with competitive interest rates for qualifying borrowers. Some loans may be eligible for same-day funding.


Photo credit: iStock/Khosrork

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