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What are income-based consolidation loans?
A healthy income may help you get a consolidation loan — even with poor credit.
Having a relatively high income but a low credit score is a common scenario. Perhaps you had to rack up credit card debt for medical bills or living expenses before landing a big promotion. Or you’re a recent college graduate with a high-paying job but haven’t had time to establish your credit history and want to consolidate your private student loans.
Since most lenders prioritize credit scores, getting a consolidation loan can be tough without the right score. But options exist if you can afford the loan — you just may pay higher rates or be required to put up collateral.
What are income-based consolidation loans?
Income-based consolidation loans are specifically designed for consolidating debt and prioritize your income level over your credit score. Rather than deciding based on your credit score, lenders assess your ability to repay a consolidation loan based primarily on how much money you make.
One of the most common uses for consolidation loans is to combine multiple high-interest credit card debts into one monthly payment at a lower rate. But it can also be used to consolidate all types of consumer debts, including medical bills, appliance purchases, installment loans or even private student loans.
How do income-based consolidation loans work?
An income-based consolidation loan works much like a traditional personal loan — you borrow a lump sum and repay it in fixed monthly installments with interest. It can be unsecured or require collateral, especially if your credit isn’t great.
The loan funds are usually deposited into your bank account for you to pay off debts, but some lenders may pay creditors directly. In some cases, this could be required or come with a rate discount.
Where to find income-based consolidation loans
It’s possible to find income-based consolidation loans anywhere you can find personal loans, such as banks, credit unions and online lenders. Online lenders generally have more lenient requirements to qualify, but checking with your local bank or credit union is always a good first stop.
If you have a solid history with your regular bank, it might be more likely to give you a consolidation loan — even with poor credit. Credit unions are an even better option because they often have more flexible credit requirements.
What are the eligibility requirements for income-based consolidation loans?
The exact requirements to qualify for an income-based loan vary by lender, but here are the basics:
- Proof of income. Depending on the loan size, there’s usually a minimum income requirement you’ll need to meet. Some lenders may be satisfied with viewing your bank statements, but others may require W-2s, pay stubs or even tax returns.
- Debt-to-income ratio. Your DTI ratio expresses how much of your income goes toward debt payments, and 35% or less is generally considered good by lenders. For an income-based loan, however, you may need an even lower ratio to qualify.
- Credit score. Even if you have a high income and low DTI, most lenders will review your credit history and check your score. Some may not have a minimum score requirement, but others may have a number where they draw the line regardless of your income.
- Time of employment. Along with proof of income, you may also need to verify how long you’ve been at your current job. For example, an income-based lender is more likely to approve the loan if you’ve been with your employer for three years than three months.
How to apply for an income-based consolidation loan
Applying for an income-based loan may vary a bit depending on the lender, but it’s basically the same as getting a regular personal loan:
- Check your credit score. Even though you’re going for an income-based consolidation loan, the lender will still check your credit, so it’s a good idea to know where you stand.
- Calculate your DTI ratio. You can figure out your DTI ratio by dividing your monthly debt payments by your income. For example, if your debt payments are $1,000 a month and your income is $3,000, your DTI ratio is 33%, which is pretty good.
- Compare lenders. Find lenders that offer this type of loan, check that you meet the requirements and then compare rates and terms to find the best deal.
- Prequalify. Most lenders let you prequalify to give you an idea of the rates, terms and monthly payment you might qualify for.
- Apply. Fill out the loan application online, over the phone or in person and submit your proof of income and other required documentation.
- Review and sign. If you decide to accept the offer, read over your agreement and take note of the terms before you sign.
- Get funded. For a consolidation loan, the funds may be deposited into your account or the lender might disburse the funds directly to your creditors.
Your loan could be funded within a day or two after approval, but depending on the lender, it may take up to a week or more. Also, if the lender is paying your creditors directly, keep making on-time payments until you’re notified that the debts are paid up.
How much an income-based consolidation loan costs
The cost of an income-based consolidation depends on two key factors: APR and loan term. Your rate, typically between 5.99% and 35.99%, is based on your income, credit score and debt-to-income ratio. Poor credit means higher rates, but collateral may help lower them. You may also be on the hook for an origination fee of up to 12% of the loan amount.
Loan terms matter, too. Shorter loan terms mean higher payments but less interest, while longer terms lower your payments but mean you’ll pay more in interest over the life of the loan. The trick is to get the shortest loan term with monthly payments you can comfortably afford.
Calculate your monthly loan payments
Use our loan repayment calculator to compare monthly payments and the total cost of an income-based consolidation loan based on different rates and loan terms.
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Pros and cons of income-based consolidation loans
Consolidating your debts into one monthly payment can be a huge plus, but it may be harder to qualify for a loan. Here are a few other benefits and drawbacks of income-based consolidation loans:
Pros
- May qualify with a lower credit score
- On-time payments improve credit
- Flexible loan terms may be available
Cons
- Typically higher rates
- May have to pay an origination fee
- Could require collateral
- Rate may not be lower than your existing debts
Alternatives to income-based consolidation loans
It can be tougher to find an income-based loan, so you may want to consider other options.
- Traditional personal loan. Even if your credit isn’t great, some lenders offer personal loans for borrowers with bad credit, but watch out for high rates and added fees.
- Get a cosigner. Asking a friend or family member with excellent credit to cosign the loan can dramatically raise your chances of getting a consolidation loan at a competitive rate.
- Credit card balance transfers. These days, a ton of credit cards offer 0% financing on balance transfers for up to a year or more. But there’s typically a 3% to 5% transaction fee, and you’ll need to repay it before the promotional period ends to avoid steep rates.
- Home equity financing. If you own a home, you may be able to use a home equity loan or home equity line of credit (HELOC) to consolidate debt because you’re using your house as collateral.
- Try credit counseling. If you don’t qualify for a loan, you may want to visit a nonprofit credit counseling agency. Their fees are generally cheap, and experienced counselors can help you set up a budget and a debt repayment strategy that works for you.
- Get a side hustle. In this gig economy, there are a ton of options to earn money in your free time that can go toward your debt.
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Bottom line
It’s easy to find yourself in a situation where you have a high income and a low credit score but need a loan. A lower credit score can make finding a loan more difficult, but there are options if you shop around and compare multiple lenders. However, be prepared for the possibility of higher rates or putting up collateral.
Frequently asked questions
Is an income-based consolidation loan a good idea?
If you qualify for an APR that is less than your average rate on your debts, a consolidation loan makes sense.
However, if the rate you offered is more than you’re currently paying, a consolidation loan wouldn’t make sense. In that case, you may want to work on paying down your debt and increasing your credit score so you can qualify for a better deal on a consolidation loan down the road.
Can you do income-based repayment on consolidated loans?
An income-based repayment plan — aka, income-driven repayment (IDR) plan — is only available if you are consolidating federal student loans. How it works is your monthly payment is calculated based on your income and family size as opposed to your loan balance. There is no similar option for private student loans or other consolidation loans.
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