- What is really a low-income loan?
- Types of low-income loans
- Can I be eligible for a a low-income loan?
- Alternatives to low-income loans
What is a low-income loan?
Whether you're considered \”low income\” depends on factors outside your pay, for example family size where you live. The U.S. Department of Health and Human Services provides poverty guidelines, but regardless of your earnings, getting by can be a challenge, particularly if you live in a costly city.
The lending criteria for personal loans may include evidence of income. If you fall under the low-income category, you may not qualify for the loans you would like – or the welfare rates and terms. You may even find some lenders market high-cost products to borrowers with limited income.
Types of low-income loans
When you have low income and you are searching for a loan, it might feel like you don't have a lot of options and those you do have are expensive.
For example, one expensive low-income loan choice is a payday loan. Pay day loans are short-term loans for small amounts. They often come with steep fees and are supposed to be repaid within 2 to 4 weeks – usually when you are getting your next paycheck.
Payday loans are notorious for high fees – sometimes reaching the equivalent of a nearly 400% APR, according to the Consumer Financial Protection Bureau. When it comes to payday loan fees, you will probably pay $10 to $30 for each $100 you borrow. Our prime costs and short repayment term can make it difficult to pay off the loan. And when you cannot repay balance by the deadline and want to roll the debt right into a new payday loan, it's much more costly.
Fortunately, you have other available choices for low-income loans. Here are a few.
- Secured personal loans – When you apply for any secured loan, lenders ask you to offer assets for collateral. This may be a good thing just like a car, checking account or certificate of deposit, for instance. If you cannot repay the loan, the lending company can take the collateral to repay balance. These financing options are less risky for lenders and may be simpler to qualify for, even if you don't have good credit.
- Unsecured personal loans – Lenders don't require collateral for unsecured loans. But based on your credit, the trade-off may be higher interest rates. And you still might need to meet any income requirements the lending company might have.
- Small unsecured personal loans – These are loans for less than $3,000. Specifics – like your loan term, interest rate and monthly payment – is determined by your credit profile along with other factors.
- Payday alternative loans – If you're a person in a federal credit union, inquire about applying for a payday alternative loan, or PAL. PAL term lengths range from one to 12 months with loan amounts up to $2,000. Rates of interest for PALs are capped at 28%, and also you won't see a credit card applicatoin fee in excess of $20.
Can I qualify for a low-income loan?
Qualifying for any personal loan with low income may be difficult, but your income may not be a deal breaker. While lenders may verify your income to gauge your ability to settle the loan, it's not the only factor in managing your loan terms. You may also be able to include additional causes of income like alimony, supporting your children or government benefits.
As a part of their underwriting process, lenders may consider your debt-to-income ratio. This is a comparison of the total debt versus your income – another indicator of methods likely you might be to repay your loan.
Lenders may also consider your credit scores and history. Before you apply for a financial loan, check your credit ratings and take a look at credit reports to obtain an idea of where your credit stands.
Alternatives to low-income loans
When you have low income and want cash, cutting your budget or picking up a side job may help, however it might not be enough – or even possible. Fortunately, if low-income loan options aren't effective for you personally, you may have alternatives. Here are a few possible solutions.
- Ask family or friends for a financial loan. There's nothing fun about hitting up your friends for the money. But they might be prepared to help you get from a difficult spot. Putting all the details in writing will let you avoid trouble later.
- Seek assistance. There may be local resources you have not considered. Community groups and nonprofits might have choices to help bridge your shortfall. They may offer emergency credit or payday loans. As well as your employer might have financial-assistance programs to help you through a rough patch.
- Consider getting a co-signer. A relative or friend with good credit might be prepared to co-sign an unsecured loan with you. If they do, they might be in a position to help you to get a much better deal on a personal loan. But be aware that if you cannot pay off the personal loan, your co-signer is also accountable for it. Carefully read the loan's small print before attempting this – not all lenders take.
- Take a cash advance. Borrowing money from your charge cards through a cash advance is really a risky option. Your credit card may have a grace period for purchases, but that is not usually the case for money advances. Often, the interest starts accruing immediately, in a high rate, with extra fees. But even dealing with high charge card rates of interest may be much better than paying a triple-digit APR for a payday loan.
Bottom line
When there isn't a lot of wiggle room in your budget, unplanned expenses can be painful. They create it difficult to cover the fundamental costs of living. While you start digging into low-income loan options to assist with emergency expenses, don't get discouraged. You do have options beyond high-interest items like payday loans.
There are options to consider – plus they might be less expensive than you expect. Weigh the pros and cons – including the term, payment per month, APR and fees – of each option. Spending additional time researching could equal to a lower loan cost in the long run.
