Getting qualified for a loan while being on benefits can be quite challenging, but it does not preclude you from applying for government-backed loans. There are a couple of options you can consider using when you are on benefits and cash is tight.
However, make sure that all types of loans for people on benefits are small loans, which are ideal for funding unexpected expenses. Experts advise against using these loans for recurring expenses. Be cautious while using these loans because they tend to trap you into an ongoing cycle of debt if you overborrow.
Loan options you can consider when you are on benefits
Here are the loan options that you can consider while you are on benefits:
Budgeting loans
Budgeting loans are government-backed loans. They are aimed at those who are on benefits. However, they are restricted in their use. A budgeting loan can be used to pay for the following expenses:
- Rent
- Moving costs
- Maternity costs
- Funeral costs
- Furniture or household items
- Clothes
- Footwear
- Domestic travelling costs
- Home improvement
- Costs linked to finding a new job
- Repaying loans taken for the above items
You must have been receiving the following benefits for six months in order to be eligible for a budgeting loan:
- Pension credit
- Income support
- Income-related employment and support allowance
- Income-based jobseeker’s allowance
If you get Universal Credit, you cannot apply for a budgeting loan. Instead, you will apply for a budgeting advance loan. They are also meant to pay for one-off costs mentioned above. Budgeting advance loans cannot be used for rent, paying off other debts, food, and household bills.
Both types of loans are interest-free. It means you will only pay back what you borrow. You do not have to pay back this amount in a lump sum. Repayments are automatically deducted from benefits. The repayment amount is decided based on benefits you receive, income from any other side gig, and what you can afford to pay. Weekly repayments will be deducted. The repayment term cannot be more than 2 years.
Credit union loans
Budgeting loans are not meant for everyone. Further, they are not meant to fund food, unexpected utility bills and other household expenses. Credit unions are non-profit community lenders. As compared to online lenders, they charge very low interest rates. The loan amount ranges from £100 to £3,000. However, you will need to become a member of a local credit union in order to borrow money.
Credit union loans might provide you with a flexible repayment plan. Based on your current financial condition, you will be required to make monthly payments. It is important to note that you will be required to discharge the whole debt in one fell swoop if the loan amount is a paltry sum, for example, between £100 and £500. If you borrow a small amount of money, you should carefully consider your repayment capacity.
Loans from specialist lenders
Most lenders lend money to borrowers with consistent and regular income sources, but there are a few specialist lenders who provide unemployment loans. This does not mean that you do not need to have any income source at all. Of course, you will need to demonstrate your affordability. You must have a side gig. In the absence of a side gig, your benefits will be regarded as your income.
If you are on benefits and need a loan today from a direct lender, you can consider a specialist lender who provides loans to people on unemployment benefits. You can use these loans to pay a wide range of expenses. No restrictions are imposed on the use of loans. Whether you need money for food or unexpected utility bills, you can use loans for the unemployed.
Although lenders do not impose restrictions on the use of unemployment loans, it is still recommended that you use these loans for one-off costs. Experts advise against using these loans for recurring expenses such as food and household bills.
Risks and limitations
Here are the risks and limitations of loans on benefits:
- High interest rates
Interest rates for these loans are quite high. The loan amount is small, and yet the default risk is quite high. It is likely that you will fail to repay the loan. In order to reduce the default risk, lenders charge very high interest rates.
- The risk of getting into debt
The risk of getting into an ongoing cycle of debt is quite high. The loan amount is small, but it is repaid in one fell swoop within a short space of time. If you fail to repay the debt, the loan is rolled over. This will increase the total cost of the debt due to late payment charges and interest penalties. Eventually, you get trapped in an ongoing cycle of borrowing.
Do not assume that the impact is less severe if you fail to repay the debt to credit unions. Missed payments are recovered from your savings. Additionally, you will face credit score damage. Sometimes, legal action can be taken.
- Limited loan amount
Whether you borrow from a direct lender or a credit union, you will not be able to borrow a large amount of money. You should ideally avoid using these loans because you will most likely be left with insufficient cash. As a result, your financial condition may become even worse.
The final word
If you are on benefits and need a loan, you can consider borrowing from a direct lender or credit union. However, it is recommended that you avoid using these loans for recurring expenses.
At the time of using these loans, you should ensure that you will not struggle with repayment. Whether you borrow money from a credit union or a direct lender, non-payment can take a toll on your credit score. Try setting aside a large amount of emergency funds so you can dip into them when you are out of work or on benefits.