Those with low incomes are often the people who need loans the most, but they find them the hardest to get. Lenders will assess borrowers in several ways, including their annual income and debt-to-income ratio (DTI).
Borrowers without much disposable income, such as those with low-income families, are deemed the highest risks. Lenders know that offering a loan to a low-income borrower means there is a chance the borrower will not be able to make their monthly loan payment during their loan term.
Securing a low-income loan may be challenging, but they are not entirely impossible. Here we will walk you through what you need to know in order to secure a personal loan and also offer some tips for what steps you can take if your personal loan application is rejected.
What Do Lenders Consider a Low Income?
There is no one set figure that classifies a borrower as “low income,” and the figures may vary from lender to lender.
However, you can always look at your state’s area median income as a guide, and consider whether your current income has you falling above or below that number.
According to the U.S. Census Bureau, the median household income for the United States is $62,843. If your median household income is $30,000, you can be fairly certain a borrower would classify you as “low income.”
This does not mean an automatic rejection when it comes to your loan application, but it does mean you are facing an uphill battle in the process.
The good news is there are some participating lenders who will work with borrowers who have incomes as low as $20,000. This means it’s entirely possible to secure a low-income home loan, repair loan, or other forms of financial relief.
Before you approach a potential financial institution for your loan options, you will need to do some prep work to ensure your application is accepted.
How to Get a Personal Loan if You Have a Low Income
Because you will never know until you try, now is the time to apply for a personal loan. Even with a low income, you can and should still apply for a loan if you really need the funds and have no other savings or ways to manage your expenses. Here are the steps you should take when you are ready to move forward:
1. Shop Til You Drop!
In this case, we mean shop around for the best loan—we certainly do not mean you should add more debt. Check out the rates available from different financial institutions for their offered loan program.
Be sure you also investigate their fees and read consumer reviews. You may want to find a program that has benefits such as loan forgiveness, payment assistance, and other perks that will make your monthly payment easier.
Once you have found the best possible options, follow the personal loan application process and submit your information so the lender can assess you as a potential borrower.
You will need to provide pay stubs as well as some other financial documentation. Be sure you submit every item the lender requests in the application; missing documents could slow down the application process.
If your personal loan application is accepted you will need to sign a loan agreement, but you should only do this after reviewing the fine print carefully. If you are a first-time borrower or at all unsure about the loan, ask a trusted family member or friend with financial expertise to review the agreement with you before you sign.
I Am Unemployed: Can I Get a Personal Loan?
The answer to this question is yes, with some specific conditions. Being unemployed does not mean you will automatically be rejected in a personal loan application; however, you will need to show the lender you have some type of income, be it a pension, government benefits, or some other form of funding that would ultimately enable you to meet the financial requirements of your loan and make your monthly payments.
Additionally, self-employed people face a challenge with lenders who would typically ask for pay stubs in the loan application process. In this case, a self-employed individual may be able to satisfy the application requirements with copies of bank statements or tax returns instead of the usual pay stubs.
What Can I Do If My Application is Rejected?
It can be extremely discouraging to face rejection in the loan application process, but borrowers should not give up altogether. There are some proactive steps you can take to improve your chances of being accepted the next time.
Work on Your Credit Score
You can always obtain a copy of your credit report at annualcreditreport.com, and any borrower should know where she stands in terms of credit score before applying for a personal loan.
You can improve your score by making on-time payments for any accounts you have already opened, paying down high balances, and making sure you have the right mix of credit.
It may seem counterintuitive to open a new credit account to help your score, but in some cases, this actually works to reverse bad credit (as long as you make your payments on time, every time).
Find a Loan Cosigner
If you have a family member or friend in better financial standing who would be willing to cosign your loan, this could increase your chances of acceptance. It could also lower the interest rate attached to the loan.
Seek Other Resources for Financial Help
If your loan application is rejected and you are in a dire situation with expenses you cannot cover (especially in cases where you may be facing unexpected medical bills), look into charitable financial aid organizations in your area that may be able to provide short-term assistance.
Alternatives to Personal Loans
Finally, there are also some alternatives you can try, such as payday loans or title loans (if you have a lien-free title to an automobile), but these should be last-ditch efforts as they have incredibly high-interest rates.
Credit unions often provide better interest rates to borrowers than other banks, and seeking a personal loan from a credit union, even with a low income, could be the best place for you to start.