Some lenders may shy away from giving loans to people on universal credit, but that does not mean it is impossible to get one.
Getting a Loan if You Receive Universal Credit
All lenders have an ethical and legal responsibility to make sure that the people who borrow from them can afford to repay the money their loans.
Universal Credit is a means-tested benefit, and people who receive it tend to have a low income. For this reason, it can be hard to get a loan while on Universal Credit because some lenders assume that anyone on Universal Credit would struggle to repay their money on account of having a low income.
In addition to this, Universal Credit received years of bad press due to payment delays, controversial cuts and administrative mistakes as the old benefits system was phased out. As a result, some lenders may still view Universal Credit as an unreliable source of income.
Fortunately, there are still a number of ways that recipients can access credit if they find themselves in need of a loan.
What Loans Can I Get?
There are plenty of borrowing options available for people on Universal Credit, which are detailed below along with the pros and cons of each one.
Borrowing From the Government
~The government has temporarily frozen access to budgeting loans due to the Coronavirus crisis, but the service is expected to resume at some point in July 2020~
It is possible to get an interest-free loan of up to £821 from the government if you have been on Universal Credit for at least six months. During this time you should not have earned more than £2600.
This loan, known as a budgeting loan, can be used to help with one-off expenses, such as boiler repair or school uniforms. The money is repaid through regular deductions from your Universal Credit payments over 6-12 months.
If you’ve been on Universal Credit for less than six months, you can still apply for a loan, but only for help with job-related expenses, such as interview attire. You can read more about budgeting loans and apply here.
‘Bad Credit’ Borrowing
Even if you have a good credit rating, you could find it difficult to get accepted for many loans from mainstream lenders if you have a low income or are on Universal Credit.
Certain types of loan aimed at people with bad credit histories may be more likely to accept Universal Credit applicants, provided you still pass affordability checks.
‘Credit Builder’ Credit Cards
With a ‘credit builder’ credit card, you have access to a small credit limit, which you can dip in and out of as you please. The interest rate tends to be higher than with standard credit cards so you’ll need to make sure you pay off your balance in full each month to avoid costly charges.
However, this can be a useful tool if you ‘re looking for ongoing flexible borrowing for small amounts of money.
‘Bad Credit’ Personal Loans
When you take out a ‘bad credit’ personal loan, the bank agrees to lend you a fixed amount of money over a set period of time. You can borrow for longer than with most short term loans which means you can reduce the amount of money you have to pay each month. Over the course of the loan, you make monthly deposits to pay off your balance and any interest.
These loans tend to have smaller limits (up to £5000) and higher interest rates than standard personal loans.
Peer-to-peer services pair up individuals who are willing to lend money with individuals wanting to borrow it.
Many peer-to-peer lenders have loans available for borrowers who would traditionally be considered ‘high risk’, such as people on benefits or with low incomes.
As with personal loans from banks, peer-to-peer loans tend to be spread over longer periods of time than short term lending, however interest rates can be quite high if you fall into a ‘high risk’ category.
Short term loans and payday loans are very easy to access but come with notoriously high-interest rates and penalty fees for late payments. 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.
Credit Union are not-for-profit organisations where members can pool savings and borrow money at competitive rates.
Many credit unions offer loans to people on benefits, including Universal Credit. However, you are often required to save with the union for a certain period of time before you can borrow- so it may not be ideal if you’re in a tight spot.
In addition to this, you need to have something in common with a union’s members in order to join (such as occupation or where you live), so there is no guarantee that everyone will have access to one.
A guarantor loan could help you access more credit at a better interest rate if you are struggling to find competitive deals. A guarantor is someone who promises to repay the money you borrow if you default on the loan. Anyone over the age of 21 who has a regular income and good credit rating can be a guarantor.
When you apply for your loan from the bank, the guarantor will co-sign the contract. If you fail to keep up with the fixed monthly payments over the course of the loan, the guarantor becomes liable to pay the outstanding balance.
Paying Back Your Loan
It is vital to consider how you will finance the repayments on your loan before taking one out. You should think carefully about how much you can afford to repay each month before you make an application.
It may also be a good idea to look for a lender with a flexible contract or who charges low penalty fees. If there is not much wiggle room in your budget, then unforeseen expenses or disruption to your income could potentially derail your payment plan and cause you further problems.
Having a flexible contract could help you avoid costly penalty fees or damage to your credit report if you run into problems further down the line.
Will Taking Out a Loan Affect My Universal Credit Entitlement?
Universal Credit is a means-tested benefit, which means some larger payouts and loans could affect your eligibility.
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 Universal Credit.
At the moment, the capital limit is £6000- so, in theory, you could borrow up to £6000 without it affecting your Universal Credit. However, 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 Universal Credit entitlement.
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