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Loans based on employment, not credit: a guide

Learn how your income can help you qualify for a loan if you have less-than-perfect credit.

Yuliya Benkhina
June 28, 2024

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Borrowing funds can be a lifeline or an opportunity, depending on your financial goals and circumstances. However, the path to reaching your desired financial outcomes can be rocky if your credit history is limited or compromised. 

If you have poor credit but a steady income, this may feel unfair. After all, you have the ability to pay your debts. Luckily, there are loan products that were built for your exact situation. In this article, we will discuss loans based on employment, not credit. We’ll cover the pros and cons, different loan types, and everything you need to know about applying for loans based on income.  

How loans based on income work

When you complete a typical loan application, your lender will generally look at a few different things:  

  • Your credit score 
  • Proof of income 
  • Your DTI (debt-to-income ratio) 
  • Additional factors, such as reserves 

When you apply for a loan based on income, the lender skips that first step and does not take your credit score into account. Since your credit score is viewed as one of the biggest factors in determining the risk of lending you funds, loans based on employment, not credit, may balance out that risk with higher fees and steeper interest rates. 

Sometimes, these loans will require some form of collateral, making them a type of secured loan. Loans based on income are generally a subset of a personal loan. You can compare a few options for loans based on income, not credit here

Pros and cons of income-based loans

Like any other type of financial decision, loans based on income come with their own pros and cons – which will vary on an individual basis. It’s important to evaluate these factors before moving forward with a lender. 

Pros of income-based loans 

When you are looking for a loan, the pros of getting one may seem obvious. 

  • You may be able to qualify with bad credit.
  • Lenders may offer payment plans tailored to your financial needs. 
  • Lenders may offer a longer repayment term, lowering monthly payments. 
  • You may be able to improve your credit score by making timely payments, opening the door to other financial opportunities in the future. 

Cons of income-based loans

No matter how dire the financial need is, make sure to also consider the potential consequences of borrowing. 

  • The interest and fees will be higher than a traditional loan. 
  • You may need to offer collateral, which can be repossessed if you default on your loan. 
  • Missing any payments will further injure your credit score, which will make borrowing more challenging in the future.  
  • Some lenders who are willing to overlook a poor credit score may be unscrupulous and looking to take advantage of borrowers in a tough situation. 

How to get an income-based loan

If you are ready to move forward with a loan based on employment, not credit – here’s how you can get started. 

  1. Assess your financial health

Before you start the application process with any lenders, make sure you know what you are working with. Review your credit report for any discrepancies, get a good understanding of your DTI, and calculate what kind of monthly payment you can afford after you get your loan.  

  1. Improve what you can before applying

While it can take some time to turn your credit score around – and that may not be an option during your ideal funding timeline – make sure to fix what you can. Pick up more hours at work for a better pay stub, build your reserves in your bank account, and stay current on your existing monthly obligations. 

  1. Compare lenders

While it can feel tempting to jump on the first available offer, borrowers with lower credit scores need to take added caution before moving forward with any one lender. Look at as many loan options as you can, review different possible loan amounts and loan terms, and read plenty of reviews. If anything makes you feel suspicious, dig deeper before sharing any personal information. 

  1. Prequalify for multiple offers

Once you’ve reviewed the available lenders and built a list, try to prequalify for as many options as possible. Prequalifying will let you see a more detailed view of what a lender can offer you, and should not require verifying any documentation. 

  1. Gather your documentation and apply 

With your prequalifications in hand, the path forward should be clear, and you should be ready to accept your best offer. At this point, you will need to verify your identity and your income, as well as provide any necessary collateral. Your lender will likely request your W-2 and paystubs, proof of your identity such as your I.D. or social security number, and a snapshot of your bank account and savings. 

Alternatives to consider

If what you find when you look into loans based on income leaves something to be desired, you may want to consider looking into these alternatives: 

Personal loans

While a loan based on employment, not credit, is generally considered a subset of a personal loan, depending on your financial situation, you may want to consider a more traditional personal loan instead. 

  • How it works – Personal loans come with fast funding times and a simple application process. Loan terms vary greatly depending on the lender and the borrower – rates can be competitive or sky-high, and funding amounts can range from very small to upwards of $100,000. 
  • Why it may work for you – While some personal loan lenders only work with high-credit applicants, there are as many personal loan programs in the world as there are banks. Not every lender will reject you with a low score, especially if you have a good income. 
  • Requirements – Some lenders will work with scores as low as 560. You’ll need a DTI of no more than 40%, although lower always better. 
  • Considerations – Peer-to-peer personal loans may be more flexible about credit scores than traditional lenders. P2P companies and local credit unions are the best place to start your search if you do not have perfect credit. Remember, when reviewing advertised rate ranges, the lower your credit score, the higher your interest rate is likely to be. 

Cash advance loans

A more contemporary alternative to a payday loan, cash-advance loans are often app-based, and come with much more reasonable rates. 

  • How it works – You’ll need to download a cash advance application and connect it to your bank account. Repayment will often be automatic when your paycheck comes in. Many cash advance apps require an annual membership, which comes with a fee. 
  • Why it may work for you – If you are looking for a lightning-quick loan that is smaller than your next paycheck, a cash advance app can be a great option. 
  • Requirements – You’ll need a bank account and a steady paycheck. 
  • Considerations – Because repayment will come from your bank account automatically, you’ll need to tread carefully to avoid overdraft fees. Additionally, it’s important to do your research and fully understand the fees and costs associated with any specific app you choose. 

Payday alternative loans

While payday loans should be avoided at all possible costs, payday alternative loans (PALs) can be a better option for borrowers looking for a small amount to make ends meet until their paycheck comes in. 

  • How it works – Similarly to a payday loan, PALs offer a small, short-term loan based on your documented income. The chief difference is in the interest rate – PALs will not come with the 300% APRs that make payday loans so dangerous. 
  • Why it may work for you – This quick, small loan will most likely not require a credit check. If you are looking for a small amount that you would like to pay back quickly, these products can be a great fit. 
  • Requirements – Lenders require a steady, documented paycheck. 
  • Considerations – These loans are typically offered by credit unions, and generally have a cutoff of $2,000. You’ll most likely need to become a member of the credit union as part of the application process. 

Asset-based loans to consider

If you have an asset you can leverage to reduce a lender’s risk, you may be eligible for better terms or a larger loan through a secured loan product. An asset can be a home or other property type, or even a 401(k) or another retirement account. 

Home equity loans/lines of credit

Home equity loans and home equity lines of credit (HELOCs) are backed by your home. While the repayment and disbursement of funds for these loan products are different (HELOCs work more like credit cards, while home equity loans are more like a second mortgage), the requirements, maximum amounts, and total costs look very similar. 

  • How it works – You get cash via either lump sum or line of credit based on the  equity in your home. You repay this via monthly payments – with a HELOC, interest-only payments for the initial phase. These products generally come with a more favorable interest rate. 
  • Why it may work for you – If your credit score is moderate, but you have a strong income and a home with plenty of equity, you may still be able to qualify for a HELOC or home equity loan. 
  • Requirements – Your credit score will need to be above 620 at a minimum, your DTI will generally need to be under 43%, and you’ll need at least 20% equity in your home. 
  • Considerations – If you default on a HELOC or home equity loan, more than just your credit score will be at risk. Because your home serves as collateral for the loan, a lender can initiate a foreclosure if you fail to make your payments. 

Home equity investments

A home equity investment (HEI)  is an alternative to more traditional home equity products. Qualification requirements are much more flexible, and you don’t have to make any monthly payments for the duration of your HEI term. 

  • How it works – You get cash today in exchange for a share of your home’s value in the future. There are no monthly payments, and many HEI providers don’t even have income requirements. You may be eligible with a broad range of credit scores. 
  • Why it may work for you – HEI companies extend funds to homeowners with credit scores above 500, making it much easier to qualify if your credit score is not perfect. HEIs are also a superlative option for homeowners whose income documentation may be shaky – there are no income requirements at all. 
  • Requirements – A home in an eligible area, a 500+ credit score, and plenty of home equity. 
  • Considerations – Although there are no monthly payments, you will eventually have to repay your HEI via a balloon payment, typically through a home sale or cash-out refinance. Like any other product secured by your home, defaulting on the obligation can lead to foreclosure. 

401(k) loans

If you have a well-funded retirement account through your employer, you may be able to solve for your financial need by lending yourself the money. 

  • How it works – You reach out to your account administrator to start the process of borrowing up to $50,000 or half of your balance, whichever is smaller. 
  • Why it may work for you – Your credit score is not taken into account when applying for a 401(k) loan. 
  • Requirements – An eligible 401(k) account. You must repay this type of loan within 5 years or risk tax penalties. 
  • Considerations – Borrowing from your retirement nest egg can feel convenient in the shortterm, but can damage your financial security and retirement goals in the long-run. Not repaying your loan within the allotted term can lead to the loan being treated – and taxed – as an early withdrawal.  

Final thoughts

Your credit score does not have to be an obstacle when it comes to getting the funds you need to achieve your financial goals. You can find loans based on employment, not credit – and even financial products where a lower credit score is not an issue at all. If you are a homeowner, consider seeing how much you could get with an HEI from Point – applicants with credit challenges are welcome.

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