Loans for people on benefits

What are my loan options if I’m on benefits?

Some lenders are reluctant to take applicants receiving benefits, deeming them too risky to lend money to. But there are some lenders who will consider you if you’re getting benefits.

• Guarantor loans. A guarantor, who is contractually obliged repay any debt if you’ve failed to do so, helps to make lenders feel comfortable approving applicants on a low income. By seeking out guarantor loans, you therefore might be able to access deals that would otherwise have been out of your reach.
• Secured loans. Not for the faint-hearted, a secured loan lets you put up an asset as collateral against late repayments. This also helps lenders see you a less of a risk when assessing your creditworthiness. If you have a home – even with an existing mortgage – you may be able to offer property equity as collateral. However, your home would be at risk if you fail to make repayments.
• Credit-builder credit cards. These credit cards are aimed at applicants with low income and poor credit ratings. The credit limits are typically lower than traditional credit cards and the APR is often very high. Nevertheless, the eligibility criteria are much looser than those of other cards, so it could be a useful credit option for people on benefits.
• Vehicle finance plans. This is a secured loan used to buy a new vehicle. The cost of the purchase is split into monthly repayments with interest added on top, and the vehicle itself is used as collateral on the loan.
• Specialist lenders. Some lenders specialise in offering loans to people who have a low income or a poor credit history. These loans do have higher interest rates than those on offer from traditional lenders though, so ensure you can meet the monthly repayments before applying.
• Payday loans. These short term loans are easy to be approved for, but the interest rates are astronomical. Consider these a last resort once all other avenues have been explored.

Does receiving benefits affect my credit score?

The benefits you receive from the government do not appear on your credit record and therefore have no direct impact on your eligibility for loans.

However, the fact that you’re eligible for government loans nearly always means that you have some sort of difficulty with your income.

Your regular income will be assessed by lenders, and if it’s believed there’s a risk of you struggling to meet your monthly repayments, your application will be rejected.

If you agree that meeting the repayments will be difficult, you shouldn’t apply in the first place. However, for many recipients of benefits, this isn’t the case at all.

How to get a loan while receiving benefits

• Budgeting. Perhaps the most important step is ensuring you can afford the monthly repayments on any loan you’re approved for. These loans are meant to provide additional financial assistance, not cause more troubles.
• Check your credit record. Order a free credit check from the likes of Experian, TransUnion (formerly Callcredit) or Equifax. This will give you an idea of how risky lenders are likely to deem you. Remember, a failed credit application will harm your credit score further, so choose the products you apply for wisely.
• Compare lenders. Use the comparison tables on finder.com to compare the lenders.
• Apply. The easiest way to apply is through the lender’s website. The lender will want some personal details, financial details and to run a credit check. The outcome of your application will be revealed within seconds, and you could have the money in your account that same day.

Dos and don’ts

What about a broker?

As long as you bear in mind that it’s unlikely to check the whole market, but instead subsection of lenders with whom it has an arrangement, then a broker can take the strain out of finding suitable lenders. Brokers find the best rate available to you from their panel of lenders, taking into account your individual circumstances. Generally this service is free, because the broker will earn a referral fee from the lender.

Some brokers or “matching services” can now run soft searches with a range of lenders in seconds, meaning that without any impact on your credit score you’ll be able to get realistic rate quotes for loans you’re likely to be approved for. This can be a smart way to avoid disappointment, protect your credit score and focus on lenders likely to approve you.

The bottom line

It’s unfortunate that people on benefits have more difficulty accessing traditional loans, as they’re often among the people who need them the most. Nevertheless, if you’re in this situation, it’s worth remembering that there are many alternative forms of credit and by following the tips above and comparing options using the finder.com comparison tables, you should be able to find a great deal for your needs.