Some lenders may shy away from giving loans to people on benefits, but that doesn’t mean it’s impossible to get one.
Find out how benefits could affect the types of loan available to you and where to look for a better chance of securing credit.
Do Benefits Affect Your Credit Score?
You may be led to believe that receiving benefits damages your credit score, but this is not true.
Your credit score is based on your credit report, which contains information about all your past credit accounts, borrowing and debt. If you have paid your debts on time in the past and managed to keep your total debts fairly low, you probably have a good credit score.
If you have a habit of missing payments or have a large amount of debt, your score is probably lower.
Either way, your benefits don’t come into the picture. Apart from some basic information about you, all a lender can see by looking at your credit file is how you’ve managed your debts over the years.
What Loans Can I Get?
Unfortunately, it’s not just someone’s credit rating that lenders consider before loaning them cash- they also want to see that they can afford to pay the loan back. This is known as an ‘affordability assessment’.
Because many people on benefits have a low income, some lenders avoid lending to people on benefits altogether. Fortunately, many lenders treat applications on a case-by-case basis, so even if you are on benefits, there are still many typed of loan you can get as you can show your income is high enough to meet repayments:
‘Bad Credit’ Personal Loan
‘Bad credit’ personal loans are unsecured, just like regular personal loans but tend to have lower borrowing limits and high-interest rates. Although the name suggests these are just for people with poor credit histories, people with low incomes or no credit history can also be accepted for ‘bad credit’ personal loans.
The bank agrees to lend you a fixed amount of money over a set period of time. Each month, you make regular deposits to pay off your balance and the interest on the loan.
Unlike payday loans and short-term lending, personal loans are not highlighted on your credit report, meaning future lenders will not be able to tell you used a ‘bad credit’ product.
- Pros: You can spread them over quite a long period of time; traditional lenders are very cautious about lending more than you can afford
- Cons: Can be an expensive way to borrow due to high-interest rates
Credit-Builder Credit Card
Many mainstream providers have ‘credit builder’ credit cards, aimed at people whose income is too low to qualify for a normal credit card, want to build a credit profile or have patchy credit histories.
They are sometimes called ‘bad credit’ credit cards but are by no means just for borrowers with bad credit.
They tend to have low credit limits (although some lenders offer up to £3000 if you have a good credit score) and high-interest rates.
You’ll need to pay off your balance in full each month to avoid being charged interest. However, some providers have interest-free introductory offers, which gives you several months to pay off your balance before getting hit by the high-interest rates.
A credit card can be a useful tool if you can manage your payments well, as you won’t have to reapply for credit again next time you need a loan.
- Pros: You’ll have the card to dip into again in future if you need another loan; you may be able to pay off your balance slowly if you get an interest-free deal
- Cons: Relatively low limits; high-interest rates if you don’t pay your balance off
A credit union is a not-for-profit organization where member pool their savings and loan them out to each other. They often have lower interest rates than for-profit lenders and cap them at a certain level. This can make them cheaper than other borrowing options.
However, to join one, you must have something in common with its members (such as where you live, or your occupation) and some may require to save with them for a certain period of time before you can start borrowing money.
- Pros: Lower interest rates than many lenders
- Cons: You may not be able to get a loan immediately as many credit unions need you to save with them before you borrow
If you own a home, vehicle or another valuable asset you could consider using this as security to borrow money. It is important to be absolutely certain that you can afford to repay the loan before you put anything up as security because if you don’t make your repayments, the lender has the right to ‘repossess’ and sell your possessions to recover their money.
Two of the most common types of secured lending in the UK are logbook loans and homeowner loans.
With a logbook loan, you can borrow up to 50% of the value of your car or vehicle. Applications and payout can be made online and are often same-day. You continue to use your car throughout the duration of the loan, but if you fall behind on repayments, the lender can repossess your vehicle without having to go to court.
With a homeowner’s loan, you use your home as security. After signing a contract, the lender deposits a lump sum to your account, after which you start to make regular payments towards the debt.
How much you can borrow depends on the value of your home and how much you have left on your mortgage. If you are in need of a large lump sum (£10,000+), this may be an option worth considering.
If you don’t keep up with repayments, the lender can repossess your home.
- Pros: Allows you to access credit even with a low income or bad credit rating; homeowners loans can help people with low incomes to borrow larger sums of money
- Cons: Very risky if you don’t keep up with repayments
Short Term Loans Or Payday Loans
Short term loans and payday loans are very easy to access but come with notoriously high-interest rates and fees. However, unlike many traditional lenders, these providers encourage applications from consumers with bad credit ratings and low incomes.
Borrowing is normally limited to smaller amounts, and most short-term loans are for a few hundred pounds, although it is possible to borrow up to several thousand. Short-term loans may stretch over a few months, whereas payday loans are repaid in full plus interest on your next payday.
If you’re late to make a repayment, you could face penalty fees or further debt or be asked to ‘rollover’ your debt. This is when you agree to take out a new loan to cover the unpaid costs from the old one and usually involves administration fees.
- Pros: Almost guaranteed to be accepted; very quick and easy to apply for
- Cons: Very high-interest rates; Due to the short loan term it can be difficult to payback
The government offers interest-free budgeting loans to people on certain benefits to help with certain expenses. If you have received Jobseekers Allowance, Employment and Support Allowance or Income Support for at least six months, you can apply for a loan of up to £821 from the government. You can use the money to help with expenses from maternity costs, to UK-wide travel or home appliances.
If you are waiting for your first Universal Credits payment, you can apply for an advance of up to one month’s Universal Credit while you wait. In both cases, repayments are deducted from your future benefits payments until you have cleared the loan.
- Pros: Interest-free borrowing
- Cons: Application process can be relatively slow; repayment of Universal Credits advance can be up to 40% of your future Universal Credit payment
Equity release is available to homeowners over 55 years old. You ‘release’ the money tied up in your home by taking out a tax-free loan against the value of your home, which is repaid when you die or move into long term care.
With the most common kind of equity release, known as a ‘lifetime mortgage’, it is possible to borrow up to 50% of the value of your home through equity release; the older they are, the more you’ll be able to borrow.
Because you don’t make any repayments on loan, the amount that you are charged interest on keep growing and can account for a significant portion of your home’s value by the end of the loan term.
Some people choose to release equity gradually in small amounts to help limit the chance for equity to build up. This is known as a ‘drawdown’ facility.
It is important to note that equity release can affect your means-tested benefits.
- Pros: No repayments to make as long as you’re alive; no need to downsize
- Cons: Interest can end up consuming nearly all of your home’s value; equity release affects means-tested benefits, so you may end up losing more money than you gain; downsizing could be a better option for some people
With a guarantor loan, someone with a higher income and good credit rating agrees to pay your loan if you default. By using a guarantor, you may be able to borrow more money and be charged less interest.
These loans are available from both high-street banks and a handful of online providers. Most of the time, guarantors co-sign on unsecured personal loans; however, in some cases, the guarantor could offer an asset (such as their home) as security.
If you don’t keep up with payments or default on your loan, your guarantor could end up paying the price. They are liable to repay your debts if you default on the loan, and even if you are just late in making a payment, it could still damage their credit rating.
- Pros: May help you access better deals or borrow more
- Cons: Can be risky for the guarantor; could put your relationship under strain
Will Taking Out A Loan Affect My Benefits?
Some larger payouts and loans could affect your means-tested benefits. The main means-tested benefits are:
- Income-based Jobseekers Allowance
- Income-related Employment and Support Allowance
- Housing Benefit
- Income Support
- Pension Credit
- Universal Credit
- Council tax reductions
When you take out a loan, it counts towards your ‘capital limit’, which is the maximum you can hold in capital or savings before it starts affecting your right to certain benefits.
At the moment, the capital limit is £6000, so in theory, you could borrow up to £6000 without it affecting your benefits. This will be less if you already have savings.
If you are not sure whether this applies to you or how your money will be counted, contact Citizens Advice for free advice and the latest information on benefits entitlements.
How Can Flexy Loans Help?
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They have already helped thousands of people get loans already, and they can do the same for you.
Choosing a loan broker like us (we don’t charge any fees) means our application process matches you with the best loan available to you. All lenders we recommend are regulated by the FCA, which gives you an additional layer of protection.
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