If you have a low income, you might feel like you have fewer options when it comes to getting a loan. While it’s true your income is one of the main things taken into account when applying for a loan or line of credit, this is only one side of the story.
Although it can be more challenging to qualify for a loan, it’s not impossible. If you’re asking whether it’s possible to get a loan with a low income, the answer is clear – yes.
Whether you’re trying to purchase a home or get a personal loan with a low income, you have to be careful. You’re more likely to face a higher interest rate or other extra fees, so it pays to do your research. In this guide, we’ll explain how it’s possible to get a loan with a low income and what to look out for.
What Is a Low Income Loan?
Low income doesn’t always mean the same thing everywhere. In most places in Australia, this is defined as anyone who is earning less than 50% of their state’s median income. In some parts of the country, like high cost of living areas, this can even apply to those earning less than 80% of the median income.
Because lenders are in the business of making money, they want to know they’re lending funds to those who can afford to pay them back on time. If you fall into the low income category, that makes you a riskier investment since you’re less likely to have the money to pay it back.
That being said, there are loans specifically designed with low income individuals and households in mind. Low income loans usually bring higher fees and expenses over time, however, so it’s important to know exactly what you’re getting into.
Types of low income loans are:
- Payday loans – The most dangerous type of low income loan is a payday loan. These are short term loans, and they have notoriously high fees which leads to the payday lending cycle.
- Secured personal loans – Many lenders will ask for something as collateral to secure a personal loan, like a car or savings account. These are lower risk for the lender, so you can often get a better rate.
- Unsecured personal loan – On the other hand, an unsecured personal loan doesn’t require any collateral, but you’ll likely have a higher interest rate.
While these loans have a time and a place, they’re not always the best long-term investment. It’s generally better to work on improving how you appear to lenders than choosing an expensive, risky loan.
Improve Your Loan Application
How can you improve your loan application even with a low income? There are many ways to make yourself look like a stronger candidate. This can mean access to more desirable mortgages, better rates, and so on.
While it’s a good idea to work on creating a budget that works for you and practising strong financial skills, this is only the first step. Building your credit rating takes time (and sometimes money), so you might also want to try these ideas below to increase your standing with lenders:
- Consider all income – Your income is actually more than your paycheque. Many banks also use other proofs of income like Centrelink payments, child support, pensions, and even supplemental income.
- Save – Saving has a lot of positive benefits, including boosting your appearance to prospective lenders. If you can save a larger deposit when buying a home, for example, you’ll have much more room to secure a competitive rate.
- Guarantor or co-signer – If there’s someone you trust who might be willing to be the guarantor for your loan, this can also show banks that you’re a serious candidate. Keep in mind that this co-signer will be on the line legally for the loan if you’re unable to make payments.
- Pay your debt – Lastly, actively pay down debt and reduce expenses to show you’re not burdened financially.
There are quite a few ways to show banks that you mean business, even if you can’t achieve a higher pay right away. As we mentioned above, your creditworthiness takes into account many different factors to determine whether you qualify for a loan. Having a low income can make this a challenge, but it’s never impossible.
Is a Loan Right for You?
While a loan can be the best way to afford a milestone purchase, like a home or car, it might not be the right fit for you depending on your income. There are always alternatives that can be a bit more affordable. It’s important to avoid the common low income loan traps, like the payday lending cycle.
When in doubt, talk to the experts on 1300 368 322. At Debt Busters, our team have over 15 years of experience helping Aussies of all backgrounds navigate their loan options. We can assist anyone of any income, so don’t hesitate to reach out for help no matter what steps you take next.