- Emma Parker
- May 7, 2022
Personal loans are unsecured and therefore carry high-interest rates. Securing a personal loan can be very challenging when you have a bad credit rating and low income. A majority of lenders sign off on applications when you have a stable source of income and a good credit report.
However, there are a few lenders that will allow you to borrow money. Although your good credit file shows your loyalty toward financial obligations, lenders believe that sometimes it may result from unavoidable circumstances.
For instance, you may fall sick in hospital and miss the payment date. As you cannot meet the eligibility criteria that lenders follow, you will have to prove your repaying capacity through other ways. It is vital to note that minimum income does not mean that you cannot repay the debt you are taking out.
What is a Low-Income Personal Loan?
Before lenders approve a personal loan, they will look at your income level. Your income level will be perused not to analyze your repaying capacity but to know whether you earn a minimum amount of money to secure a personal loan.
However, there is no threshold for minimum income as it depends on the cost of living at different locations. Further, it depends on the lender’s policy as well. Some lenders may require you to have a minimum income, while others require only proof of income.
If you earn lower than the minimum requirement set by a lender, you should apply for these loans with a lender that checks affordability. If you prove that you can pay back the debt on time, the lender will approve your application.
Tips to Qualify for a Personal Loan with Low Income despite a Poor Credit Score
Getting a personal loan with a low income can be difficult when your credit score is also not stellar. However, it is not impossible at all. It can require you to work harder and do more research to secure a good deal.
Look over your Credit Report
Your bad credit score may be more than you expected, and this may result in rejection. It may be because of errors showing up on your credit report. You should get a free copy of your credit report from all credit reference agencies to see if your report has some errors that may be responsible for your bad credit score.
Identity theft is one of the causes of a poor credit rating. It may show up as an account unpaid despite the whole settlement.
If you find any errors in your credit file, you should immediately dispute them. Credit bureaus will talk to the lender to get details about all accounts to see if there are any discrepancies. The agencies will take almost a month to remove all those errors.
Write down all your Income Sources
Note down all list of income sources, so you know how much you are earning every month. You can show as many income sources to your lender as possible. It will work in your favor. If you see your income is less than the requirement by the lender you want to apply to, you should research to find out lenders who just check your affordability to approve your loan application.
However, before that, it is crucial to determine whether the income you are earning is enough to settle your debt payments. A lender will run a credit check and peruse your bank statement to see if you can afford it. In the case of skepticism, they will turn it down, and your credit score will further go down.
Use the online loan calculator to check estimated monthly payments and the total cost of the debt. Calculate if your current monthly income allows you to cover the estimated monthly cost after putting by for regular monthly expenses.
Do not forget priorities like payments of bad credit loans with no credit check. Try to have a scope for extra payments because actual payments involve fees and other charges, so are usually higher than the estimated one.
Arrange a Co-Signer
Even though a lender approves your application, you will likely get it at a higher interest rate. The high-interest rate can add up to the cost of the debt. You should arrange a co-borrower or a co-signer to save money on interest.
If they have a higher income and a good credit score, you will be able to secure a deal at affordable interest rates. By arranging a co-signer, you can also borrow money from a lender with the minimum requirement criteria to approve your loan application.
It is intrinsic to note that you are not solely responsible for payments. The co-borrower is the applicant, so their credit score will also be looked over. However, if you enter into an agreement with a co-signer, you will be entirely responsible for paying off the debt.
The lender will call the co-signer when you make a default. As this can pull their credit points, they may be reluctant to sign the agreement. This is why arranging a co-signer is not that easy.
Ask for Less Money
If you cannot arrange a co-signor or a co-borrower, the best approach is to apply for less money. The interest rate depends on the amount you are borrowing. As you are already on low income and have a poor credit rating, the lender may not want to bear the risk of lending too much money.
Instead of facing rejection, you should ask a lender for less money. A smaller loan size means lower monthly payments and lowers the total cost of the debt.
Lower down your Debt-to-Income Ratio
Much as your credit score is not excellent, you can still try to get money at competitive interest rates. You should lower down your debt-to-income ratio. It is suggested that you do not have an outstanding debt at the time of a personal loan application.
However, if you have a credit card bill or guaranteed bad credit loans, you should see the debt-to-income ratio is not more than 25 to 30%. The lower this ratio is, the better it is. A lower debt-to-income ratio will support your repaying capacity.
Alternatives for Personal Loans with Low Income
If you cannot qualify for a personal loan due to little income and a bad credit rating, you should seek the following alternatives:
Family and Friends
Try to borrow money from family and friends. You do not have to pay back the money with interest. This can be a great way to fund your needs when it is necessary.
You can use several government assistance programmers when you cannot qualify for a private personal loan.
Look for a Secured Loan
Little income increases the lending risk, which doubles if you have a less-than-stellar credit score; therefore, you may face rejection. A secure loan may increase some chances of approval.
Getting a personal loan with a low income when your credit score is poor can be difficult, but you can qualify for it by following the tips mentioned above.
Emma Parker is a financial counsellor at LondonLoansBank and has been serving for over 5 years. She is a psychology graduate from the University of Glasgow. Since she has keen interest in the finance field, she pursued a diploma course in banking and finance that led her to opt for her current career. She assists people choose the best loan based on their current financial situation and credit score. As Emma understands how people react to money problems, she gives them a helping hand to solve their financial complications.