Personal loans for low-income earners

If you are a low-income earner and find yourself in need of money to cover a major life expense, a personal loan may be one option. There are a variety of different types of loans available for low-income earners, and the type of loan you can take out will depend on your own particular financial circumstances.

While personal loans may be available for low-income borrowers in some cases, it is worthwhile keeping in mind that there can be risks attached. Before taking out or applying for a personal loan, it’s important to check the terms and conditions very carefully, and consider any other suitable alternatives that might be available to you, to avoid additional financial stress.

What is a personal loan?

A personal loan is a specific amount of money that you can borrow in order to pay for something. When you take out a personal loan, you will need to repay the balance, along with any interest and fees the lender charges, over a set period of time, known as a term.

People typically take out personal loans to cover a variety of expenses, from everyday needs like buying a car or paying medical bills, to life events like weddings and holidays, or for the purpose of debt consolidation.

Personal loans can come with fixed or variable interest rates, and can be secured or unsecured.

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Can low-income earners take out personal loans?

Personal loans are available for low-income earners in some cases, although the specific products on offer may be different to what higher-income earners are able to access. Your income plays an important role in determining loan eligibility, but it is not the only factor. Lenders also assess your overall financial situation, including your expenses, debts, and ability to repay the loan.

For example, a high-income earner with significant debts and limited disposable income might struggle to qualify for a loan, while a low-income earner with a well-managed budget, stable income, and good credit history may be approved.

What do lenders consider?

Lenders assess multiple factors to determine your eligibility and borrowing capacity:

• Income: This includes employment income, and in some cases, regular Centrelink payments such as pensions or benefits. Some lenders accept Centrelink as a primary or secondary income source if it meets their minimum income requirements.

• Employment status: Full-time, part-time, casual, or self-employed applicants may be eligible. Some lenders may require a minimum employment tenure, such as 24 months for self-employment.

• Credit history: A good credit score can significantly improve your chances of loan approval, as it demonstrates your reliability in repaying debt. However, some lenders may still consider applicants with limited or poor credit histories, depending on their risk appetite. While some lenders may be more flexible in assessing applicants with less-than-ideal credit, they will still carefully evaluate your overall financial situation to ensure that you can repay the loan.

• Existing debts and expenses: Lenders evaluate your current financial commitments to ensure you can manage additional loan repayments without hardship.

• Minimum income requirement: There is no standard minimum income requirement for personal loans in Australia. Some lenders may require a minimum annual income, while others may not have a minimum income but might charge higher interest rates or fees to offset the risk. Different lenders generally have different eligibility criteria, so it is important to check the specific requirements for the loan you are considering.

Where can you get a low-income personal loan?

There are a variety of lenders that offer personal loans for small amounts. Most major banks and financial institutions will offer personal loans to low-income borrowers, as long as the amount requested is small and the borrower meets the lender’s eligibility criteria. Alternatively, you could consider comparing your options online or speaking to a personal loan broker to find a loan that is appropriate for your situation.

Most banks and other financial institutions that offer personal loans will allow you to apply for one either online or in person at a branch, depending on your preference and whether your lender has any physical branches near you.

What are the eligibility criteria for low-income personal loans?

There are no hard-and-fast eligibility criteria for low-income personal loans, as these will differ between lenders. Some lenders will set a minimum income requirement, while others will not. Likewise, some lenders may specify that Centrelink recipients are not eligible to apply for loans.

Typically speaking, lenders will take into account factors like your employment situation, your credit score, your expenses and your ability to repay a loan.

What should you consider when comparing personal loans?

When comparing personal loans, it is worthwhile to consider such factors as the interest rate of the loan, possible fees and charges, whether the loan is secured or unsecured, and any financial penalties you might face for early repayment. It is also worth considering the possible impact of a loan on your credit score, and your own ability to make repayments.

Interest rates

Interest rates for loans will typically either be fixed (meaning they stay the same throughout the term of the loan) or variable (meaning they fluctuate depending on a number of factors such as the cash rate). It is worth remembering that, with a variable rate, your lender could change your interest rate at any time, potentially making it higher which would make your personal loan more expensive. Additionally, interest rates are not the only defining factor in determining what you will pay for a loan, so it is important to also consider fees and charges.

Fees and charges

Some loans come with one-off application fees, while others can come with ongoing annual or monthly fees, as well as early repayment fees. It is important to know what you’ll be charged and how often before signing up or applying for a loan. It’s also important to keep in mind that loans for low-income borrowers may come with higher fees than other types of personal loans, which means they can potentially be expensive to pay back.

Secured vs unsecured loans

Loans can either be secured or unsecured. A secured loan requires you to provide an asset, such as a vehicle, as security, while an unsecured loan does not require an asset, but is still subject to your ability to repay it. Generally speaking, secured loans tend to carry lower interest rates than unsecured ones.

However, if you are unable to meet your repayments on a secured loan, a lender will be able to take the asset on which the loan is secured and sell it to recover the money. Likewise, if you are unable to pay back an unsecured personal loan, a lender may take you to court to recover the debt.

For low-income earners, secured personal loans may be easier to qualify for, as the presence of collateral can reduce the lender’s risk. Even if your income is modest or your credit history is limited, offering an asset as security can improve your chances of approval and may result in more favourable loan terms. However, it’s important to remember that if you default on a secured loan, you risk losing the asset you have put up as collateral. Always consider whether you can comfortably manage repayments before committing to any type of personal loan.

Repayment terms

Lenders have different requirements in terms of loan repayments, and these can be on a monthly, fortnightly or even weekly basis. It is important to understand when and how often you will be required to make repayments, and whether this lines up with what you can afford based on your financial situation, as weekly or fortnightly payments may not be practical for every borrower.

Loan term

The term of a loan refers to how long you will have to pay it back overall. Short-term and payday loans typically come with terms of 16 days to a year, while traditional personal loans typically have much longer terms of 1-7 years. Before applying for a loan, consider the term, and the timeframe in which you would be comfortable paying the lender back.

Penalties

If you take out a variable rate loan, you may be able to make additional repayments, but it is typically not possible to do this on a fixed rate loan, and you may be charged a penalty for paying the balance of your loan off early. Check with your lender or financial adviser before applying for a loan to confirm what penalties may apply.

Impact on credit score

Each time you apply for a loan, this is recorded on your credit history. If you make a number of applications within a short space of time, your credit score could be negatively affected, and this could potentially make it more difficult to be approved for loans in future.

Your own ability to repay a loan

Perhaps most importantly, it is worth asking yourself whether you can realistically pay a loan back. If you feel you are unable to meet the repayment requirements on a loan, you may want to reconsider taking one out, as you could potentially find yourself in a situation where you are in more debt than you were before.

What are some alternatives to personal loans?

If you are concerned that taking out a personal loan on a low income could be a risky option, you may want to consider one of the alternatives available. There are other ways that low-income earners can borrow money to cover the costs of living that may not require you to go into as much debt.

For example, as a Centrelink recipient, you may be eligible to receive advance payments, depending on the amount you currently receive. If you’re of Age Pension age and own property in Australia, you may be eligible for the Home Equity Access Scheme (HEAS), a government-backed program that allows older Australians to access the equity in their home to boost their retirement income.

If you are considering a short-term loan (such as a payday loan), it is worth remembering that these kinds of loans typically come with high fees and short repayment periods, and can end up being significantly more expensive than other types of loans. The fees on these loans can often exceed the amount borrowed, warns the financial regulator ASIC.

Some people may also turn to Buy Now Pay Later (BNPL) services to manage emergency purchases. While these can seem convenient, it’s essential to read the full terms and conditions. The money still needs to be repaid, and late fees or account charges may apply.

Unlike traditional lenders, BNPL providers don’t yet need to meet the responsible lending obligations that apply under the National Credit Code. Without these checks in place, you run the risk of borrowing more money than you could afford to repay. So take time to assess your options carefully to avoid worsening your financial situation further.

What can you do if you’re experiencing financial difficulty?

If you are experiencing financial difficulty or feeling stressed or overwhelmed by your financial situation, you can contact a financial counsellor for help. Financial counselling is typically government-funded, free, non-judgmental and confidential.

A financial counsellor can help you negotiate with creditors including banks and lenders, utility providers, landlords and the Australian Taxation Office (ATO). They can also help you create and plan budgets, and understand what forms of financial support may be available to you.

You can call the National Debt Helpline on 1800 007 007 to speak to a financial counsellor for free.

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