A loan can be a blessing when you are in a financial bind. No matter how much we plan, there are times when the cash we have isn’t enough to meet our needs. Luckily, there are ways to find a loan based on income, not credit.
Applying for that loan, however, is a journey in and of itself. No matter what type of loan you get, your credit is going to be an essential factor. A simple credit check can be the difference between getting a good deal on a loan and getting poor terms. For some people, income-based loans are a more accessible option than credit-based loans.
What Is a Loan Based on Income?
An income-based loan is a personal loan that is ideal for people who either have little or not-so-great credit. Instead of focusing on your credit score, you can get one of these loans by having enough income to repay it. The logic is relatively simple: If you have a job, income-based lenders are more likely to have funds available to repay the loan. Additionally, approvals can come easier and faster with these types of loans.
To fill in the gaps between paychecks or to help catch up on bills and expenses, income-based personal loans can be the fast relief that you’re looking for when you find yourself in a tight financial spot. In this blog, we’ll explore a few types of income-based loan options available to you and how to avoid turning these short-term, problem-solving loans into long-term financial burdens.
Origination Fees For a Loan Based on Income
Before you get into any personal loan agreement, the most important thing to understand is how much it will cost you. Amid financial trouble, we can quickly lose sight of the consequences of a loan—the interest and potentially high fees.
Regardless of the loan amount, many personal loans incur an origination fee. Also known as an underwriting fee, an origination fee compensates the lender for the loan processing. This includes handling the application, preparing legal documents, and other office-related expenses. Origination fees can come attached to a loan agreement at a fixed or variable rate that depends on the loan amount. Typically, origination fees range anywhere from 1%-8%.
While these profitable origination fees were mandatory parts of loans like mortgages in the past, today’s creditors will apply origination fees to auto loans, private student loans, and personal loans as they see fit. When creditors choose to waive them, they will make money on loans in other ways. For example, if your loan doesn’t have an origination fee, you will most likely have a higher interest rate than a personal loan that does have one.
One loan guaranteed to have an origination fee is a federal student loan. The amount of the fee depends on the type of loan it is. Direct subsidized and unsubsidized loans and Direct PLUS loans (for parents of students) can range from 1% to 4.3%.
The lender deducts this fee from the loan amount before it reaches you, so consider that deduction in your overall budgeting plans.
A payday loan—also known as a cash advance—is an income-based personal loan designed to get you out of short-term financial trouble.
These loans help people fill the gaps between one paycheck and the next. Depending on the due date or creditor, crippling late fees can be applied to late payments, so these loans can help people avoid falling into further debt that, if reported to the credit bureaus, could do damage to their credit score.
Here’s a simple breakdown of how they work:
In this case, a borrower goes to the lender, a payday loan company, and applies for a loan. Payday loan lenders are just about everywhere; there are over 20,000 payday lenders in the United States. Most application processes only require the borrower to have a valid ID, checking account, and proof of income to apply.
The borrower writes a personal check for the amount of money they need to borrow, plus the interest and fees. The lender then gives the borrower the loan amount and cashes the check after about 14 days. Many payday loans are now done online, which is much easier for the borrower.
The Danger of Payday Loans
For the borrower, payday loans aren’t a wise choice unless you can repay them on time. These loans have strict loan terms and typically require full payment within a matter of days or weeks.
When you don’t pay your loan on time, the remaining loan amount rolls into a new loan with new fees. If you don’t manage them properly, payday loans can cause significant damage to your credit. Before you take on this type of loan, be sure that you understand the fine print. A little research can make all the difference for your overall financial health.
An income-based loan will be subject to some higher interest rates and tighter conditions than a regular personal loan. However, some alternatives to payday loans can help you climb out of debt without the high fees.
Here are a few:
Credit Union Loan
A credit union is a nonprofit organization that provides services to its members based on their best interests. Credit unions are organized into social, peer, and professional affiliations, which dictate the investment opportunities that shape the operations. Credit union memberships are typically lifetime, and they offer better rates and terms than other alternatives.
Categorically, most credit unions can provide a host of financial services to people with poor credit. Credit unions pay less attention to your credit score and more attention to things like your annual income. They may also review your credit history (your record of timely or late payments to your past and present creditors).
Payday Alternative Loan
There are federal credit unions that offer an option called an alternative payday loan. These loans are designed to be an alternative to the “traditional” payday loan. With an alternative payday loan, you can get a loan for $2,000 under a loan term that can range anywhere from a month to a full year. Interest on the loan maxes out at 28%—a far better rate than the interest on a payday loan amount, which can be as high as 700% or more for every $100 borrowed.
To qualify for an alternative payday loan, you must be a member of a credit union. Research the credit union in your area and see if you have any affiliations that qualify you for membership in one near you or online.
Peer-to-Peer (P2P) Personal Loans
With peer-to-peer (P2P) lending, borrowers can avoid using conventional financing options and conditions. In this relatively new lending structure, P2P lending connects investors looking to fund loans to people who need money.
Instead of applying at a bank or credit union, borrowers can work with a P2P lending company to find an investor—or group of investors—to finance their loan amount. While traditional financial institutions may rely more on credit scores to make loan decisions, P2P loan lenders can distribute an arbitrary loan amount and set an interest rate based on other factors like income and credit history. Moreover, these loans have very flexible loan terms that can help borrowers make on-time, consistent repayments. While your terms and conditions will be based on your credit score, the loan decision itself will rely a lot more on your overall creditworthiness. P2P lenders are investors that are following market trends and behavior. So they are more interested in why you want the loan and if you have the means to pay it back.
P2P loans are growing in popularity because they can provide people with not-so-great credit with a chance to get a loan with a reasonable interest rate and avoid the tight conditions and higher interest rates that come with payday loans.
Bad Credit Score Loan
Another alternative to a payday loan is a bad credit loan. A bad credit loan is one that may be available for people that have no credit at all or have a FICO credit score lower than 600—a score range that virtually no low-interest lenders will work with.
As good credit scores improve interest rates for loans (makes them lower), bad credit scores make lousy credit loan interest rates worsen (makes them higher). The lower the credit score, the higher the interest rate. However, even with this negatively sliding scale, bad credit loans can still provide lower rates (APR’s average around 36%) and give you better loan terms that will allow you to take more time in paying the loan back.
We recommend that before you apply for any bad credit loan, you should prequalify with a few lenders so that you can compare the different interest rates and loan terms before you make a final decision. Remember, this loan will be a part of your budget for a while, so you need to be sure that you’ll be able to make repayments fit into your current schedule of bills.
Set Up Payment Plans for Bills
Sometimes, our money problems can be relieved with a bit of financial reorganization. If bills are piling up faster than you can pay them, talk with your creditors about creating new repayment plans. Instead of paying bills in lump sums, you may be able to split the balances in manageable installments. For example, many utility companies offer “budget billing” options that allow customers to pay a flat monthly rate for services based on their average annual usage.
For other debts, deferment or forbearance options may be available to postpone payments until you can pay them. Just know that there may be additional charges for taking this kind of action. However, if you can manage your debt with a bit of time instead of creating even more debt with a loan, you should consider this option.
Create a Lending Circle
A lending circle is a group of people—typically made up of family, friends, or community members—that regularly pools their money together into a financial resource that can be tapped at any time by a member of the circle. This money is usually lent to the borrower at little or no cost.
The group sets a particular amount of money for each member to be loaned. Then, each member contributes a portion of that amount so that each of them, in time, receives the loan amount they are looking for.
Let’s look at an example: Say you have a lending circle of ten people who want to create a $1000 loan. Each member makes regular contributions (monthly payments of $10 or $20) that fund the circle’s account. When a member needs money, they pull from the report and then help to replenish the charge with their monthly contributions so that someone else in the circle can take a loan later.
Lending circles are among the world’s oldest forms of personal financing; examples of them are found in cultures over thousands of years. You can create a lending circle of your own with friends and family or a lending circle that exists (there are tons available online). Some lending circles also report activity to the credit bureaus, which means that regular positive exercise could add positive points to your FICO credit score.
Borrow from Friends and Family
Asking for a loan from a family member may not be easy. But you may be able to get favorable terms. Those close to you are more likely to work with you through your financial trouble. Plus you may avoid credit checks, fees, and the overall stress associated with applying for a traditional loan.
If you decide to take this route, you should create a loan agreement, put it in writing, and pay back the loan as soon as possible. That way, you can get out of debt without putting any strain on a healthy, personal relationship.
No matter what your financial mistakes or missteps in the past were, you should be able to have access to a loan when you need one. And if you have the means to pay it off, loans based on income are an ideal option.
Just be sure to look at your lending options carefully so that you can make the right choice. If you have bad credit, you can still find creditors who will work with you based on your ability to pay them back now, instead of judging you on the past. Taking this kind of care will help you build a bright financial future.