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Updated on Thursday, March 5, 2020
Low-income borrowers have loan options, but they may struggle to qualify for the most competitive interest rates and terms. That may be particularly true with unsecured personal loans, where lenders rely on your credit and financial information to determine your ability to repay funds.
Keep reading to learn about low-income loan options, and how you can improve your odds of qualifying.
Why you may qualify for a loan even with low income
Lenders want to know that you can repay your debt. But while they typically ask about your annual income and may ask for proof, it’s not the only piece of your financial picture they’re interested in when deciding whether to extend a loan.
Common factors they’ll consider when reviewing your loan application include:
- Your credit health: How you’ve handled loans and credit in the past tells lenders how risky a borrower you are. If you have a high credit score, lenders know you’re a diligent borrower likely to pay on time and keep the account in good standing. Those with low credit scores, delinquent accounts, past bankruptcies or lots of outstanding debt will have a much harder time getting approved.
- Money in the bank: A healthy savings account balance shows lenders you have the funds to meet the repayment terms, thereby making you appear a less risky borrower than someone with both low income and little to no savings.
- Collateral (if applicable): Potentially your best bet for qualifying for a low-income loan with competitive terms is seeking one that requires collateral. When you provide collateral, you lower the lender’s risk when they provide you with a loan. Your collateral may be funds in a savings account or the value of your home minus your mortgage balance. Default on your loan, though, and the lender can seize your collateral.
- Cosigner (if applicable): If your credit score or income is too low to meet lender requirements, you can ask a family member or friend with a good credit score and higher income to cosign the loan. This means if you fail to repay, the cosigner then becomes responsible for the debt. In a way, you’re borrowing someone else’s best financial attributes to shore up your own and secure the loan.
3 types of loans for low-income borrowers
1. Personal loans
Personal loans can be used to finance nearly any expense, from a major purchase to medical bills. But the most common use for a personal loan is debt consolidation or refinancing. Traditional personal loans are unsecured, meaning you don’t need to put any assets, like your car or home equity, on the line. You’ll make monthly payments over 12 to 144 months with a fixed interest rate.
As a low-income earner, you may struggle to qualify for a personal loan, unless you have a stellar credit score and strong repayment history. Even if you qualify, you’re liable to face low loan amounts and steeper interest rates than a high earner would. Those with credit scores of 760+ can expect an average 9.96% APR, scores 720 to 759 can expect an average 12.45% APR, according to our January personal loan offers report.
Some personal loans may come with an origination fee, or a one-time cost equal to 1%-8% of the loan balance depending on your credit score, the loan amount and repayment term. Most lenders will deduct this fee from the loan proceeds. This fee can shrink the amount you ultimately borrow.
More forgiving lenders, who may be more likely to approve low-income earners, include:
2. Secured personal loans
If you’re unable to qualify for a traditional personal loan based on your income, credit history or other factors, a secured personal loan could be a good backup option for you. This type of personal loan requires that you offer up something of value to act as collateral if you default, such as a savings account balance, vehicle or home.
Because the lender can take possession of the asset used as collateral if you fail to repay, lenders view these loans as less risky than unsecured traditional personal loans and therefore, are more likely to offer you favorable terms and lower interest rates than you might qualify for otherwise.
But you need to think carefully before agreeing as these loans can be riskier to you. If you have trouble paying your bills, it’s not just your credit rating and debt balance that will suffer. You could lose ownership of your car or home, perhaps putting you in a worse financial situation than what originally led you to borrow the money.
3. Payday alternative loan
Members of federal credit unions may have access to these kinds of loans, which typically offer smaller borrowing amounts, longer repayment cycles and lower cost terms than a traditional payday loan.
Regulated by the National Credit Union Administration (NCUA), payday alternative loans, or PALs, can range from $200 to $1,000, must be repaid within one to six months, have a maximum annual interest rate of 28% and do not require borrowers to undergo a credit check.
Only three PALs can be granted to the same borrower in a six-month timespan, though no loan repayment periods can overlap. And credit unions are limited to charging $20 at most in application fees.
A PAL II offers a larger borrowing limit
At the end of 2019, the NCUA authorized a second kind of payday alternative loan, known as a PAL II. It follows the same rules as PALs, except loans can be taken out for up to $2,000, the repayment period can stretch to 12 months and you do not have to belong to a credit union for a month or more to qualify. Instead, new members are immediately eligible for PAL IIs.
Can you get a loan without a job?
If you have a strong credit history and other forms of income, say from government benefits, alimony, child support, Social Security or retirement savings account withdrawals, you may still be able to qualify for the loans mentioned above.
If you are unemployed and have no current source of income, it will be difficult to find options that you’ll qualify for, unless you’re willing to accept less-than-ideal borrowing terms, such as extremely high interest rates and short repayment terms.
Those stuck with both poor credit and low income or no income face the most limited borrowing choices, as lenders will see you as extremely high risk, meaning you’ll pay the highest premium in terms of interest rates for access to credit.
Consider these 5 loan options if you’re unemployed
- Borrowing from a friend or family member: If a loved one can afford to help cover your shortfall in return for later repayment at a lower interest rate than a lender would offer, that’s the smartest and least expensive option available.
- Leaning on a credit card: Depending on the card’s interest rate and credit limit, you may be able to either finance the emergency expense directly on it or move all spending onto your card to free up cash for whatever crisis has you looking to take out a loan. If you have good credit and a relatively low APR, say below 20%, this could be a more cost-effective borrowing strategy than other loan options.
- Payday alternative loan: This one’s worth mentioning again. If you need to borrow up to $2,000, check out PALs offered by local credit unions. Interest rates are capped at 28% and repayment periods can stretch up to 12 months, making them a far less expensive option than payday loans.
- Payday loan: These are a popular (and very expensive) form of debt among people with poor credit and who need emergency funds. Lenders don’t check credit scores and loans have fast funding. Payday loans typically must be repaid in a single lump sum within a very short timespan, from 14 days to six months. Lenders typically charge a flat financing fee of about $10 to $30 per $100 borrowed, equalling an APR of almost 400% for a two-week loan.
- Car title loan: This kind of loan uses the title of your vehicle as collateral and, like a payday loan, is a very expensive form of credit. Typically loans amounts equal between 25% and 50% of the value of the car, so roughly between $100 and $5,500, and must be repaid within 15 or 30 days, leasing to APRs in the triple digits. And if you fail to repay what you owe, the lender can repossess your car, meaning you lose your transportation.
Borrowing when you have a low income is always a risky move as you likely find making ends meet on a limited wage challenging without an additional monthly bill, so be careful when agreeing to any lender’s terms. You don’t want to end up paying a 400% APR, losing your possessions or tanking your credit score.