Suffering from debt? You’re not alone – about 300 million people in the country have some form of personal debt.
If you get into financial trouble, getting a loan is a great option to salvage your situation and make it manageable. If you opt for the wrong kind of loan though, you will end up with worse financial problems.
A good way to avoid this is to get loans based on income since they’re fast and let you borrow even when your credit score isn’t ideal.
Ready to learn how income-based loans work? Read on and find out more today.
What are Loans Based on Income?
At its core, an income-based loan is a type of personal loan that disregards your credit score. Instead, it uses your means of earning as its basis for granting the loan. That means you can still get a loan even when you have a bad credit history, as long as your current regular income is strong and stable.
How Do Income-Based Loans Work?
Lenders will use a variety of criteria and methods when determining your eligibility for loans based on income. Some lenders do a soft credit inquiry before giving an offer for your loan. This isn’t the norm since most will not look at your credit history at all.
The downside of loans without a credit inquiry is that it’s a common tactic for predatory lenders to entice unsuspecting people. That’s why you need to do your research first and check for the potential lender’s online reviews. If most comments say that they have unreasonably high interest rates and fees, find another provider.
Income-based payday-loan lenders often opt not to pull your credit. The caveat is that they’ll need to verify your bank account information as well as your income. If you’re not careful, you might end up getting stuck in a debt trap due to the high fees.
What’s the Difference Between Secured and Unsecured Loans?
Income-based loans are still personal loans. That’s why they can fall to either loan type: unsecured or secured. The former doesn’t need to put up any collateral, making it a better choice for you as a borrower. The drawback is that you might need to pay a higher rate of interest since your lender takes on more risk.
For secured loans, you’ll need to offer a piece of collateral, such as your car or house, to the lender. This serves as collateral for your loan, meaning that your lender can take it to recoup their losses if you ever fail to repay the loan based on the agreed terms.
How Can You Apply for an Income-Based Loan?
Once you find a lender willing to put more weight on your income than your credit history, you’ll need to do some research before deciding to work with them. You’ll need to know the requirements and other key terms necessary for your loan. Here are some:
The average range of personal loan APRs is between 5% to over 36%. Some payday loans can exceed this rate—so much that it can exceed 100%. It’s also important to remember that the APR also includes the other fees you might pay for the loan.
Some lenders might ask your bank account details as a verification of your financial situation. This is important since it can become a major factor on whether your loan application gets accepted.
This ties in with your account information. Most lenders will ask you to verify your income using payslips and other documents. It’s needed to measure how capable you are of repaying your loan.
Loan Amount and Loan Term
The former is the amount you’re qualified to get. It depends on income if it’s an income-based loan, but most other personal loan types will use your credit history. The latter is the amount of time you need to repay your debt.
In most cases, loan terms can last from six months to 60 months. It’s worth noting that you’ll pay more interest if your loan term is longer, so it’s better to get a shorter-term loan so you don’t spend as much money on interest.
How to Use Income-Based Loans for Credit-Building
One of the most common uses of income-based personal loans is to build credit. Take note that this only works if you’re responsible enough to use it. When done right, this helps raise your credit score and helps you qualify for better financial funding later on.
Here are some tips to use an income-based loan for improving your credit score:
1. Make Your Payments on Time
This seems like a no-brainer, but there is another layer to this tip. Make sure that your lender reports your payments to the three primary consumer credit bureaus. If they don’t, your credit score will not change, defeating the purpose of the loan.
2. Get Another Form of Credit
Whenever you get a personal loan, you might add a new credit type to your credit reports. The mix of your credit will affect your credit scores, but it isn’t as impactful as paying on time. Getting different credit types like installment loans, credit cards, and mortgages can help improve your efforts.
Should You Get an Income-Based Loan?
Loans based on income are great for getting quick cash even when your credit history isn’t impressive, but to make the most out of the situation, make sure to check all the terms offered by the lender. You don’t want to fall into a debt trap and end up getting into a financial disaster later on.
Income-based loans are also great for building credit. Use it to your advantage and get better funding options in the future.
Why stop here? You can discover more tips and tricks by checking out our other guides today!