It can be hard to borrow money if you’re on benefits. While loans can provide temporary financial relief for immediate and unforeseen costs, there may be extra hurdles involved in being approved if benefits make up the bulk of your regular income.
Loans are offered under the condition that the borrower is able to repay their debts on time and in full. Lenders like these agreements to be as low risk as possible. Unfortunately, this usually means the lower your income, the more difficult it is to get a loan.
Whilst you might struggle to get traditional highstreet banks on your side, some lenders do consider income from benefits in a similar light to paid employment. This means there may still be a few different borrowing options available to you if you’re on benefits, so don’t panic.
This guide looks at how to overcome some of the struggles of being on benefits and needing a loan to become a more viable borrower in the eyes of a lender.
Can I Get a Loan if I’m on Benefits?
In short, yes. Being on benefits won’t automatically exclude you from being able to get a loan. All lenders have a responsibility to ensure the people who borrow from them can afford to pay the loan back. A loan is typically approved or rejected based on two factors:
- Your affordability. You need to show you have regular money coming in, whether from employment, benefits, student loans or elsewhere. There needs to be a decent gap between this and your regular expenses out of which repayments could come.
- Your credit history. Lenders check if you’ve borrowed money in the past and if you were able to keep up with the required payments then. Evidence that you’ve had trouble making repayments in the past may translate to higher interest rates now.
If you have regular income from benefits, can afford the repayments and have a reasonable credit score, there is every chance that you will be approved for a loan.
Does Being on Benefits Affect My Credit Score?
Claiming benefits won’t directly affect your credit score or rating. Your credit score looks at your borrowing history, and if you’ve repaid debts reliably, it doesn’t look at income. Being on benefits such as Universal Credit won’t appear anywhere in your credit history.
How Do I Check My Credit Score?
It’s a good idea to get a full picture of what a lender will see when you apply before you do so. You can check your credit score for free online using credit reference agencies such as Experian, Equifax or TransUnion. This table compares their credit scores and ratings.
|Very Poor||0 – 560||0 – 279||0 – 555|
|Poor||561 – 720||280 – 379||561 – 565|
|Fair||721 – 880||380 – 419||566 – 603|
|Good||881 – 960||420 – 465||604 – 627|
|Excellent||961 – 999||466 – 700||628 – 710|
The higher your credit score, the more reliable you have shown yourself to be when it comes to repaying loans, credit card bills, or removing debt. Lenders look favourably at this.
Can I Get a Loan With Bad Credit?
Many lenders will steer clear of applicants with poor credit ratings as this suggests to them that the borrower may struggle to successfully make repayments.
A poor credit score can be a result of a number of different factors:
- You have a history of not keeping up with payments on credit agreements such as loans, credit cards or phone and TV contracts.
- You already owe a large amount of money which you haven’t paid back yet.
- You’ve recently been through bankruptcy, CCJs or debt solutions such as individual voluntary arrangements (IVAs), debt management plans or debt relief orders.
- You haven’t got a credit history yet, for example, if you’ve just moved to the UK or if you’re young and haven’t had a bank account or credit card before.
Bad credit makes getting a loan harder, but may not be impossible. There are certain types of bad credit loans’ that focus on your current financial situation in terms of income and outgoings over your credit history. However, these come at the cost of high-interest rates and are often more expensive than other personal loans.
Borrowing Options if You’re on Benefits
If you’re on benefits, there are often specific types of loans that lenders will consider you for. You may be able to qualify for:
If you’ve been receiving benefits for six months or more, you may be eligible for a budgeting loan or budgeting advance of up to £821 from the government. The money from this loan can be used on a range of expenses, from home maintenance and rent advances to maternity payments and repaying other loans. The repayments are interest-free and are taken directly from your benefits payment on a monthly basis.
While some lenders do accept benefits as proof of regular income, they often don’t see those in receipt of benefits as prime candidates for borrowing. This means they typically find ways to limit their risk exposure and maximise the chance of getting their money back.
- Offer it at a higher interest. Whenever a lender approves a loan, they take a risk that the borrower may not pay it back. A greater chance that the loan will not be repaid, such as having a lower income, leads to higher interest rates being offered.
- Ask for security. Lenders often offer better deals if you agree to secure the loan against a valuable asset you own, such as your car or home. If you don’t pay, the lender can take the asset instead. These can be great if you need to secure a larger sum of money. However, the threat of repossession is always a very real possibility.
- Ask for a guarantor. Having a guarantor co-sign the loan application may improve your chances of being approved and may also lead to better loan deals being available to you. A guarantor is someone, typically a trusted friend or family member, who legally agrees to make the loan repayment on your behalf if you can’t.
We have written extensively about personal loans, ‘Our Guide To Understanding How Much You Can Borrow For A Personal Loan‘.
A peer-to-peer lending service pairs up someone looking to borrow money with someone willing to lend it. Some of these websites accept customers on benefits or those with poor credit. Be aware that you will likely be charged a higher than average interest rate still, but your repayment plan may be more flexible than traditional lenders would allow.
Fast loans, such as payday loans, are a quick but risky form of borrowing. They’re a short-term loan charged at very high interest, aimed at letting people borrow just enough money to tide them over until payday when they can then pay the loan back with interest.
However, you pay the price for the convenience. Payday loans are notoriously expensive and are one of the most costly ways to borrow. They also tend to come with substantial late fees or penalties that quickly stack up. If you miss any repayments or borrow more to pay them
back, you can quickly end up in a growing spiral of debt. It is for this reason that payday loans are often not recommended to those on low incomes, such as benefits.
Credit Builder Cards
There is a whole range of credit cards that are aimed at helping those with lower incomes or less-than-perfect credit ratings. These tend to be known as ‘bad credit cards’. They usually have a lower credit limit, so you can’t borrow as much and a higher APR interest rate. While this might be a more expensive way to borrow in the short term, the eligibility criteria are typically more relaxed than high street banks and can help you build your credit score too.
Credit unions are community-run saving organisations. Their members typically all have something in common: for example, they all live in the same area or have the same job role. Lending can be offered at low-interest rates, and they may accept applications from people who’ve struggled to borrow from other more mainstream lenders. However, you usually need to be a member of a credit union and save with them before you can borrow from them.
How Do I Check if I Can Afford a Loan on Benefits?
Check You’re Getting All of the Support You’re Entitled To
Double-check that you’re getting all of the government support you’re entitled to. You can use a benefits calculator such as EntitledTo or the .gov website to check what you might be able to claim. Once you enter your details, you will receive an estimate of your entitlement to benefits, tax credits and Universal Credit and further information on how to apply.
Draw Up an Accurate Budget
Before you apply for a loan, you need to have a clear idea of the money you have coming in and going out. It’s a good idea to draw up a budget that tracks all of your ingoings and outgoings. It’s better to be cautious with this and factor in enough money to cover one-off payments such as car expenses or home maintenance and repairs if you can.
Look for Ways To Boost Income or Save on Expenses
Cutting down on expenses and boosting your income are ways of freeing up surplus cash which you could potentially use to pay off a loan. These don’t have to be huge changes; things like switching energy providers, downgrading expensive TV packages and swapping to a more budget-friendly supermarket are all examples of how you can free up a little cash.
Check You Wouldn’t Be Borrowing More Than You Can Afford
If you’re on benefits, it’s possible that money is already pretty tight once you consider all of your necessary expenses. Having to factor in monthly loan repayments as well can squeeze even the most well-prepared budget. This is one example where it may make financial sense to borrow for longer and pay back more overall than cut too close with monthly repayments.
Will Improving My Credit Score Help Me Get a Loan?
As well as boosting your chances of passing affordability checks, you can also boost your chances of getting a loan approved by improving your credit score. There are several ways to improve your credit score:
- Check the main credit reference agencies have your details correct.
- Check with your local council to see if your name is on the electoral register.
- Make any existing credit card, loan and bill repayments in full and on time.
- Keep the amount you borrow to a minimum to reduce your overall debt.
Which Is the Best Loan for Me To Take Out?
There is no answer for which is the best loan; there is only the best option for your individual circumstances. To weigh up the pros and cons of different borrowing options, think about what it is you need the loan for and do your research. This may help inform your next move.
For example, if you’re looking for a loan to fund a new piece of furniture, checking to see if you can get the item on a finance deal may be preferable to taking out a loan to pay off the whole amount in one go. If you’re looking for a loan to pay off other smaller debts, seeking a debt consolidation loan or alternative debt management plan may best suit your situation.
Support Available if You’re Struggling
If you find yourself relying on borrowing to pay for your regular expenses, it’s worth thinking hard about whether borrowing more would solve the problem. There are a number of alternative measures to consider before looking at taking on bigger debts.
For example, Citizens Advice may be able to help you get your finances under control with budget advice and a range of other services if that’s what you need. Debt advice charities such as StepChange and the Money Advice Service offer free and impartial debt advice.
For more practical day-to-day support, local councils and charitable organisations may be able to help with sourcing food, clothing and even things like furniture and home appliances. For more specific advice, this article from Citizens Advice is a good place to start.
How Can Flexy Loans Help?
Here at Flexy Loans, we have partnered with some of the UK’s leading Lenders.
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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