Low-income loans: personal loans for a tight budget

What is a low-income personal loan?

A low-income personal loan is a loan that has no minimum income requirement or is available to individuals with low incomes. There’s no standard low-income dollar amount. Rather, what’s considered a low income varies based on factors including the cost of living in your area and your family size.

Not all lenders require you to meet a minimum income threshold. Rather, most lenders consider your credit score and ability to repay the loan. This makes it important to consider each lender’s qualifications before applying.

Types of low-income personal loans

Even if you have a low income level, financing options are available. Take your time to shop around and carefully review the terms before accepting a loan to ensure you can afford to repay it over the loan term.

Some of the most common types of low-income personal loans include:

• Secured personal loans: These are personal loans secured by collateral. It may be easier to get approved for these, even if you have a low income or poor credit score. Remember, your lender will use your collateral to repay the loan if you don’t pay as agreed.
• Unsecured personal loans: Since there’s no collateral backing this type of personal loan, qualifying is more difficult than with a secured loan. Minimum credit scores vary by lender, but in general, a credit score of at least 600 is required. While some lenders may have a minimum income threshold, most will simply want to confirm you earn enough income to make all your monthly payments.
• Small unsecured personal loans: This type of loan is like a standard unsecured personal loan but offers a lower minimum amount. For example, you may be able to borrow as little as $500 to $1,000 with this type of loan.
• Payday alternative loans: If you’re a member of a federal credit union, you may be able to qualify for a payday alternative loan. With this type of loan, you’ll be able to borrow a small amount that carries a much lower cost than a traditional payday loan and can be repaid over a longer period. You can borrow any amount up to $2,000, which must be fully repaid in one to 12 months.

Kate Hao, the founder of Happy Mango Credit, a fintech company that helps community banks and credit unions service low- and moderate-income borrowers, had this advice for low-income borrowers: “Take the time to understand the loan offering before signing up. Make sure to always ask for the APR. Many credit unions and community banks offer affordable loans and will even work with you to create flexible payment plans.”

» MORE: How do personal loans work?

Can I qualify for a low-income personal loan?

Although it may be more difficult to qualify for a personal loan if you have a low income, it’s possible. In addition to employment income, you can also include other sources of income, like alimony, child support and government benefits.

Lenders will also look at factors such as your credit score and debt-to-income (DTI) ratio. “Banks and credit unions determine personal loan interest rates based on credit score,” said Hao, of Happy Mango Credit. “Regardless of your income level, if you have a credit score above 680, you will likely find a personal loan with a much lower interest rate than your credit card.”

You can check your credit score and history before applying. This way, you understand where your credit stands and can work on correcting any mistakes in your report and improving your score if needed before you apply.

» MORE: How to obtain a personal loan pre-qualification

Alternatives to low-income personal loans

If you need a personal loan but aren’t sure you’ll qualify, consider some alternatives. For example, you might ask friends or family to lend you the money or serve as a co-signer. Some employers even offer short-term loans or cash advances, allowing you to pay them back via payroll deductions. You can also check to see if nonprofits or community groups in your area offer emergency loans, grants or other types of financial support.

As you’re considering whether to get a low-income personal loan or an alternative, Rick Nott, a chartered financial analyst and senior wealth advisor at LourdMurray, suggests not using loans where payments are deferred and only using 0% credit card balance transfers if you’re disciplined enough to pay the balance back within the allotted time frame.

You can find alternatives to personal loans if you have a low income, but stay away from predatory loans with extremely high APRs.

“Generally speaking, I would recommend borrowers to pay attention to the compounding rate,” he said. “There are some predatory loan types that may show you a rate, but the compounding may be over a period that is monthly (not annually).”

It may be tempting to get a quick payday or title loan if you have an immediate funding need. Note that these types of loans come with extremely high APRs. For instance, a two-week payday loan can carry an APR of nearly 400%, according to the Consumer Financial Protection Bureau. Many people who rely on payday loans get stuck in a cycle of borrowing because the borrowing costs are so high.

Hao, of Happy Mango Credit, cautions against these types of loans. “Do not be lured by online payday loans that promise fast cash and could drag you into a perpetual debt cycle,” she advised.

Bottom line

Even if you have a lower income, you may be able to find a personal loan. Many lenders don’t have a minimum income threshold and consider your credit score and DTI ratio instead. As long as your credit score and DTI ratio meet the lender’s criteria, you’ll likely qualify for a personal loan. Alternatively, if you have poor credit or your budget is tight, you might be better off applying for a secured personal loan.

Before getting a personal loan, however, you need to make sure you can repay it without worsening your financial situation. There are alternatives to consider, but avoid fast funding from payday or title lenders that may trap you in a cycle of borrowing that’s difficult to escape.