What are my low-income loan options?

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In a Nutshell

Finding a loan when you’ve got low income isn’t difficult — but some will come with high interest rates and other costs. With a little work though, you may be able to find less-expensive options when your income is low and you need financing.
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When you really need money because you don’t earn enough income to cover expenses, it’s hard to find a loan with terms that won’t make your financial situation worse.

And while you might be able to find a lender willing to approve you for a loan while you have low income, it may come at a cost. It’s important to proceed with caution when you need a loan with a low income. Pay close attention to interest rates and payment terms, and research options that will cost less than expensive payday or title loans.

Here are some basics of low-income loans, including alternatives to consider.

What is a low-income loan?

Whether you’re considered “low income” depends on factors beyond your pay, such as family size and where you live. The U.S. Department of Health and Human Services provides poverty guidelines, but no matter your income, getting by can be a challenge, especially if you live in an expensive city.

The lending criteria for personal loans can include proof of income. If you fall into the low-income category, you may not qualify for the loans you want — or the best interest rates and terms. You may also find some lenders market high-cost products to borrowers with limited income.

Types of low-income loans

When you have low income and you’re searching for a loan, it may feel like you don’t have a lot of options and the ones you do have are expensive.

For example, one expensive low-income loan option is a payday loan. Payday loans are short-term loans for small amounts. They generally come with steep fees and are supposed to be repaid within two to four weeks — usually when you get 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 can expect to pay $10 to $30 for every $100 you borrow. The high costs and short repayment term can make it difficult to pay off the loan. And if you can’t pay off your balance by the deadline and need to roll the debt into a new payday loan, it’s even more costly.

Fortunately, you do have other options for low-income loans. Here are a few.

  • Secured personal loansWhen you apply for a secured loan, lenders ask you to offer assets to use as collateral. This could be an asset like a car, savings account or certificate of deposit, for example. If you can’t repay the loan, the lender can take the collateral to pay off your balance. These loans are less risky for lenders and may be easier to qualify for, even if you don’t have good credit.
  • Unsecured personal loans Lenders don’t require collateral for unsecured loans. But depending on your credit, the trade-off may be higher interest rates. And you still may need to meet any income requirements the lender might have.
  • Small unsecured personal loans — These are loans for less than $3,000. Specifics — like your loan term, interest rate and monthly payment — will depend on your credit profile and other factors.
  • Payday alternative loans — If you’re a member of a federal credit union, ask 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. Interest rates for PALs are capped at 28%, and you won’t see an application fee for more than $20.

Can I qualify for a low-income loan?

Qualifying for a 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 repay the loan, it’s not the only factor in determining your loan terms. You may also be able to include additional sources of income like alimony, child support or government benefits.

As part of their underwriting process, lenders may consider your debt-to-income ratio. This is a comparison of your total debt versus your income — another indicator of how likely you may be to repay your loan.

Lenders may also consider your credit scores and history. Before applying for a loan, check your credit scores and review your credit reports to get an idea of where your credit stands.

Alternatives to low-income loans

When you have low income and need cash, cutting your budget or picking up a side hustle could help, but it may not be enough — or even possible. Fortunately, if low-income loan options don’t work for you, you may have alternatives. Here are some possible solutions.

  • Ask friends or family for a loan. There’s nothing fun about hitting up your friends for money. But they might be willing to help you get out of a tough spot. Putting all the details in writing may help you avoid trouble later.
  • Seek assistance. There may be local resources you haven’t considered. Community groups and nonprofits may have options to help bridge your shortfall. They may offer emergency credit or cash advances. And your employer may have financial-assistance programs to help you through a rough patch.
  • Consider getting a co-signer. A family member or friend with good credit may be willing to co-sign a personal loan with you. If they do, they may be able to help you get a better deal on a personal loan. But be aware that if you can’t pay off the personal loan, your co-signer is also responsible for it. Carefully read the loan’s fine print before attempting this — not all lenders allow it.
  • Take a cash advance. Borrowing money from your credit cards through a cash advance is a risky option. Your credit card may have a grace period for purchases, but that’s not usually the case for cash advances. Often, the interest starts accruing immediately, at a high rate, with extra fees. But even dealing with high credit card interest rates may be better than paying a triple-digit APR for a payday loan.

Bottom line

When there’s not a lot of wiggle room in your budget, unplanned expenses can be painful. They make it difficult to cover the basic costs of living. As you start digging into low-income loan options to help with emergency expenses, don’t get discouraged. You do have options beyond high-interest products like payday loans.

There are alternatives to consider — and they may be more affordable than you expect. Weigh the pros and cons — including the term, monthly payment, APR and fees — of each option. Spending some extra time researching could add up to a lower loan cost in the long run.

About the author: Kate Dore is a Nashville-based personal finance writer and Candidate for CERTIFIED FINANCIAL PLANNER™ Certification. She teaches financial literacy with Junior Achievement and writes for Business Insider, Investopedia… Read more.