Loans for People on Disability Benefits

Updated: May 15, 2024 Author: Paul Gillooly

Key takeaways: Loans from mainstream lenders are geared towards people with a good and easily evidenced income. It can be hard to find loans if you are on disability benefits, but some lenders will count these payments towards affordability when assessing applicants. You can go direct to lenders who accept applications from those on disability benefits but they must be FCA authorised. There are other options like Budgeting Loans and Credit Unions.

Being disabled does not exclude you from the regular financial services markets, which includes investing money and borrowing it. Financial institutions cannot reject a loan application because an applicant is disabled under anti-discrimination rules, including the Equality Act.

However, the reality of being disabled may mean that your income is low and that you are topping up on Universal Credit or are in receipt of disability benefits. You may have no earned income at all, and that is what can make finding affordable borrowing difficult, even if you have a reasonable or good credit rating.

The reason is not your disability but the lack of income and the risk that you may struggle to meet the monthly repayments. Lenders look at different factors to assess whether or not they want to lend, and affordability is one of them. Affordability is determined by how much money goes in and out of your account each month.

What’s the answer? Look outside the mainstream for finance. There are loans advertised online for people on benefits, but the APR (Annual Percentage Rate) on these can be vast, and you can end up paying back double the amount you initially borrowed.

Lending options for people on disability benefits

Direct Loans

Direct loans are so-called because they cut out the middleman, the broker, or the credit agent. A glossy online portal with an enticing name may not be the people you are borrowing from. All these intermediaries access a panel of direct lenders positioned in the subprime credit market, which is essentially every person who is financially excluded by mainstream banks and building societies that have stricter eligibility requirements. In the subprime market, lenders consider applicants claiming benefits. By going straight to the lender, you can save time and work directly with them, perhaps even landing yourself a better deal. You can also control how many applications are made; this can affect your credit file.

You can find our list of direct lenders here. Not all accept applications from people on benefits, but we’ve saved you the time and legwork so you can narrow down your search to suit your financial situation. There are personal loans, companies like Drafty that offer revolving credit, and Credit Spring, which offer zero-interest loans on a monthly subscription-based service. Salad Money provides personal loans to public sector employees such as NHS staff. Some lenders accept applicants receiving benefits, but sometimes, these must be a top-up to an established income.

This matters for an affordability assessment as it may mean that if you work 8 hours per week and receive Universal Credit as an income top-up, for the affordability assessment, your wages for working 8 hours weekly may be all that’s used for affordability, excluding the monthly Universal Credit payments.

Because these direct lenders are operating in the bad credit (which is a higher risk) sector of the market, their rates are much higher than the mainstream banks and building societies. No direct lender can guarantee approval; under FCA regulations, they must always carry out an affordability review. Always check out any lender with the Financial Conduct Authority (FCA), especially if they are new; the FCA must authorise any organisation lending money in the UK.

Budgeting Loans

Budgeting loans are interest-free, and you may be eligible if you are getting income-related Employment and Support Allowance or Income Support and have been on these benefits for at least six months. Repayments are set against future benefit payments. 

Repayments are taken automatically from your benefits, and the repayments are based on your income and benefits combined and what you can afford. Repayments are weekly, and the maximum loan period is usually two years.

If you receive Universal Credit, you cannot apply for a budgeting loan but may be eligible for a budgeting advance. An advance is usually only available against your first payment of Universal Credit. The maximum amount you can request is an entire month’s payment, which is repaid against your future benefits within two years.

If your benefits entitlement changes and benefit payments cease, you’ll receive a letter from DWP Debt Management explaining how to repay the money you owe, as instalments can no longer be deducted. You can set up monthly payment instalments or repay the loan in full.

Credit Union Loans

A Credit Union may be able to help you with a loan if your income is part earned, part benefits-based, or solely comprised of state benefit payments. Each Credit Union has different rules, so shop around. You’ll need to be a member and you may also have to start saving with the Union before they will lend to you. Many Credit Unions require a membership period of at least ninety days before they will consider a loan application. When they do, they may link the amount you can borrow to a multiple of what’s held in your savings account. As an example, if you have a savings account balance of £200, they may approve a loan with a 3x multiple, letting you get a £600 loan with the interest rate capped at 3% monthly.

Which benefits are classified as income?

Not all benefits are classified as income for lending purposes. Here is a list of the benefits that can usually be used to support a loan (although this can vary from one lender to another): –

• Universal Credit
• Child and Tax Working Credit
• Disability Living Allowance, which is currently being replaced by Personal Independence Payment (PIP)
• Child Benefits
• Employment and Support Allowance
• Incapacity Benefits
• Fostering Allowance

What is the definition of disability?

The Equality Act 2010 defines disability as a physical or mental condition that has a substantial and long-term impact on your ability to do normal day-to-day activities. This definition applies to people with ongoing health conditions like cancer, HIV, or MS and includes mental health conditions like depression. You may not consider yourself disabled, but you could fall within this category. Disability status does not hinge on whether you currently receive state disability benefits. Not everyone classified as disabled under the Equalities Act will claim the available benefits.

Statistics indicate that around £19bn of financial support annually goes unclaimed due to a range of reasons, including “administrative complexity, a lack of awareness, and stigma”. Prior to exploring your loan options, it may be worth using a benefits calculator to ensure you are claiming the maximum support you can, and if you need support or assistance to make a claim, contact your local Citizens Advice, or an alternative (or even more specialist) advocacy service knowledgable on your health condition(s).