Borrowing money while being on benefits can be like walking on a tightrope. You may need extra cash to cover unexpected medical bills, replace a broken appliance, or manage a short-term income gap. Still, you might worry that taking out a loan can reduce the amount of benefits, leaving you financially worse off.
However, borrowing money itself is not a factor that affects your benefits. Your overall financial circumstances decide whether you will see any impact on your benefits. Bear in mind that a loan is a sum of money that you have to repay. It is not your asset, but if the borrowed amount remains in your bank account, the true amount of your savings will be miscalculated, which is taken into account to determine the size of benefits.
This scenario is, in particular, true for Universal Credit. The amount of Universal Credit is not affected if you borrow money as long as your savings are under £6,000. Payments are reduced by £4.35 per £250 per month if the capital is between £6,000 and £16,000. You cannot be entitled to Universal Credit if capital exceeds £16,000.
Keep evidence of where the money has come from
If you are on benefits and receive a substantial amount of money, you must have evidence to demonstrate where this money came from and why. You must be able to show:
- A loan agreement
- Bank statements
- Messages confirming that it is a loan
- Any acknowledgement that shows how you utilised the borrowed sum
- Repayment records
With documents, you can easily make it clear that your account has a high balance because of the loan amount. You will need these documents only if you are asked questions about your finances.
This is true even if you borrow money from family and friends. You should be able to clearly prove that you borrowed money from your friends and family. Otherwise, it will be treated as a gift. If it somehow exceeds the threshold limit of your savings, which is £6,000, payment will be deducted from your Universal Credit.
What are the safe borrowing strategies?
Protecting your benefits from the borrowing amount is one thing, and ensuring that you borrow money as per your affordability is another. Before taking out a loan, you should ensure that you will not struggle to keep up with repayments.
Here are the safe borrowing strategies:
Check your needs and compare deals
Since you are on benefits, you should not spend money on discretionary expenses. Unless your financial situation recuperates, do not spend money on inessential expenses. Make a list of your expenses, such as rent or mortgage payments, food, commute, etc to know how much money you need to stay afloat.
Check your savings and benefits to know whether you will need to borrow money to bridge the gap or not. If so, make sure that you do not borrow more than you can afford. Use online calculators to know the total cost of the debt. Comparison websites can help you compare the cost and choose the most affordable deal.
In order to choose the best UK loans for people on benefits from a direct lender, you will have to compare interest rates. If your credit score is stellar, you will likely have a chance of getting approval with a low interest rate.
Understand your repayment capacity
Bear in mind that you will not be able to borrow a large amount of money if you are on benefits. Lenders generally accept applications from borrowers who need a paltry sum to cover emergencies. These small loans seem to be affordable because the payment is made in one fell swoop and then the account is closed, but short-term loans charge exorbitant APRs. If you fall behind on the repayment, you will eventually find yourself trapped in an ongoing cycle of debt.
Ensure that you do not borrow more than your repayment capacity. It is likely that you need £1,000, but your budget has the potential to pay only £700. When your budget falls short of cash, you should consider borrowing a small amount of money to avoid being stuck with an ongoing cycle of debt.
Choose the right lender
It is vital to choose the lender that matches your requirements. Some lenders charge high interest rates while others charge lower, depending on their risk-tolerance capacity. Use comparison websites and try to get quotes from different lenders.
If that is not possible, you should try to contact a broker. They will help connect you to various lenders that match your overall credit profile. A broker can help you choose a suitable lender without affecting your credit score.
What alternative source can you consider?
If you are receiving Universal Credit and you need money to cover some essential one-off expenses, you can consider a budgeting advance. It is an interest-free loan available from the government. These loans are repaid in fixed instalments. The payments will be deducted from your benefits every month.
The following are the expenses that you can consider while using a budgeting advance:
- Replacing a broken appliance
- Work-related expenses such as buying a uniform and tools
- Small home improvements
- Travel expenses
- Funeral expenses
- Maternity expenses
- Moving costs
- Rent deposit
- Essential expenses such as clothes
It is vital to note that budgeting loans cannot cover all types of expenses. For instance:
- Ongoing living costs such as food, housing costs and other day-to-day expenses
- Regular utility bills
- Existing debts
Check your eligibility before applying for these loans. The disbursement is subject to your financial circumstances. Other factors also play a key role, such as your marital status, children status, etc.
The final word
To borrow safely without losing your benefits in the UK, you should ensure that you have proof of how you utilised the loan amount. However, not all benefits are affected by borrowing. Universal Credit drops, but only if capital exceeds £6,000.