Personal loans based on income and not a credit score can help borrowers with weak credentials obtain quick funding for a vacation, Christmas gifts, or emergency cash.
Sometimes young adults need a starting point. Other times, people need forgiveness for past mistakes or unfortunate circumstances that caused a black mark on their consumer report.
All finance companies use income-based underwriting to help them make lending decisions. Projected earnings determine whether you can afford to pay them back.
Meanwhile, select online lenders might perform underwriting without a traditional credit check and instead use alternative financial data that might shed your application in a more favorable light.
Reasons for Income-Based Personal Loans
Personal loans based on income exclusively, rather than credit score, are not for everybody because borrowing costs may be higher if approved: origination fees and interest charges.
However, they could make sense for people with derogatory data appearing on their consumer reports and young adults without a borrowing history.
An income-based personal loan might appeal to individuals with bad credit history and low FICO and Vantage scores. Instead of pulling a copy of your consumer report from Experian, Equifax, or Transunion, the lender might use alternative data sources and weigh affordability more heavily.
Bad credit loans with low monthly payments are easier to afford when the term is longer. Borrowers are less likely to become delinquent when they have a surplus after retiring the periodic obligation.
Your Debt-to-Income (DTI) ratio measures affordability, which is critical when borrowing money with bad credit. You want to show that you can handle the future payments and will not become delinquent again.
DTI = monthly debt service/monthly income
An income-based personal loan is often the only option for young adults just starting. By definition, first-time borrowers have no consumer report or credit score for lenders to check.
Loans for eighteen-year-olds with no credit history are income-based by default. Therefore, you must show evidence of ample earnings and solid employment history – unless you are attending college.
The federal government is the only lender willing to approve loans to people with no credit or earnings history. Complete the FAFSA form and get a student loan based on future income associated with a college degree.
Be prepared to verify employment and earnings when seeking a personal loan based on income only rather than credit score. If you ask the lender to disregard a critical underwriting factor, you must shine in this area.
Have these documents ready in advance.
- Monthly bank statements
- Recent tax returns
- Pay stubs dating back three months or more
- A signed letter from your employer
People with terrific job security have the best approval odds because the lender can count on your income continuing through the end of the loan term.
Meanwhile, others will face enormous challenges getting their loan approved because their income is too tiny or the source is impossible to document.
- Self-employed without proof of income
- Unemployed without job verification
- People on disability benefits (SSI & SSDI)
Types of Income-Based Personal Loans
Personal loans based on income only speak to the underwriting process used by the lender to decide whether to approve or decline an application. When asked to ignore your credit score, the type of contract plays a more prominent role in their determination.
- Shorter repayment terms pose lower default risks
- Smaller principal amounts help minimize losses
- Secured contracts allow the lender to repossess the collateral
Income-based installment loans allow you to quickly get small sums of cash, often without a credit check. They are best suited to emergencies, such as medical bills, car repair, and other urgent needs due to the high borrowing costs.
A lack of recent installment loan information could be why your credit score is too low. If so, taking out and then repaying an installment loan on time should improve your score in the future, allowing you to borrow money at better rates.
Bear in mind that installment loans have fixed monthly payments over a predefined period and many contract types with lower borrowing costs fit the broad definition.
- Personal loans
- Auto financing (loans and leasing)
Income-based auto loans are often easier to obtain without a credit score because the lenders hold the title to a valuable asset. The legal right to repossess the collateral minimizes losses, allowing them to approve more applicants.
For example, car loans are secured installment contracts. The lender holds the title until the driver retires the balance and can repossess the auto in the event of default to offset their losses.
Young adults with no credit history and older drivers with adverse payment records often find this is their only option to finance an auto.
Payday cash advances are income-based loans by definition and feature short repayment terms: one or two weeks. When making underwriting decisions, lenders rarely pull a copy of your consumer report or consider your credit score.
Instead, lenders rely on a post-dated check or written permission to debit your bank account for the amount due on the day your paycheck auto-deposits. To qualify, you must provide employment and earnings verification.
Beware of the high origination fees associated with payday cash advances, which average $15 for every $100 borrowed over one to two weeks. The charges add up quickly if you cannot repay the entire balance and roll over the loan.
Payday loan debt consolidation could be impossible without a good credit score. So make sure you have enough spare money in your following paycheck to repay the obligation right away while covering your regular bills at the same time.