Unemployed Benefits Loans for Bad Credit

Updated: May 07, 2024 Author:

Key Takeaways: Only a limited number of lenders accept unemployed benefits applicants, and fewer will approve when there’s bad credit too. Bad credit direct lenders can be in a position to assist, but you must have the type of benefit that they class as income. Most lenders accepting applicants on benefits require evidence of Universal Credit, Tax Credits, Personal Independence Payment, Child Benefit, Employment and Support Allowance, Incapacity Benefits, or Fostering Allowance. Benefits that may not be classed as income include Job Seekers Allowance, Income Support, Pension Credits and Housing Benefits.

Is there an advance available?

Before diving in and applying for a loan, consider if you’re able to get an advance based on the benefits you receive, or are awaiting a decision. Several types of benefits are not considered “income” by lenders, making it difficult to be approved for a loan. Job Seekers Allowance, Pension Credits, Income Support, and Income-related Employment and Support Allowance are generally not classed as a primary means of income by lenders. If you receive any of these, you may be able to apply for a budgeting loan.

You can check if you’re eligible on the gov.uk website. For those awaiting a decision about a claim for Universal Credit, while you’re waiting, you can apply for a budgeting advance. The aim of these is to provide you with money to support living expenses until your claim is assessed. Once your application is approved, the advance is deducted from your Universal Credit award.

Navigating the loan criteria lenders use to assess your application

Accessing loans when you’re unemployed is one of those times when it can help to work with a loan broker. Most direct lenders have strict eligibility requirements regarding the types of benefits they’ll accept as a main source of income, with some taking wages earned from part-time employment or freelance work being regarded as the only source of income, excluding Universal Credit payments or Tax Credit top-ups. Brokers work as intermediaries with knowledge of specialist lenders who only work with approved appointees.

To use an example, a few companies offering loans for the unemployed are Sunny Loans, New Horizons, and Payday UK. Each company states that they “are an introducer appointed representative of Flux Funding Limited”. When you see this happening, you can search the firm’s name on the FCA register and see what activities the company can do. Under “Consumer Credit”, it shows that the regulated activities and services they are authorised to do is “Credit Broking”. That means, they work with a panel of different lenders that they’d approach with your details in an attempt to help you secure a loan. In these instances, brokers work on your behalf to get your paperwork in order, help with the application process, and advise on whether your benefits would be sufficient to meet the eligibility criteria.

For unemployed benefits loans, it is not uncommon to go through a credit broker because most of the direct lenders, and legacy lenders (banks and building societies), don’t approve on loans to people who don’t have a traditional income from a salary-paying job.

How long can I get to repay a loan?

Loans for people on benefits tend to be short-term loans because there’s little guarantee that the income will remain the same. Personal Independence Payment (PIP) can be awarded for fixed terms of 1 year to 10 years. The shorter-term award is for when your health is expected to improve. For conditions that are life-long with little chance of lifestyle improvements, awards are for longer-term. This is factored in to the loan terms lenders use with most only approving short-term loans for up to 60 months (5 years) for people on long-term unemployment benefits.

For non-health related benefit payments, such as Universal Credit, lenders will consider all of your income, such as whether you are only receiving Universal Credit, what support group you are in (if any) and if you have any regular income being topped up by benefits, such as working self-employed or part-time. When you are working and receiving benefits as top-up income, some lenders will only consider your earnings from stable employment as income for the affordability assessment, rather than your Universal Credit award, as that’s likely to change, as will your council tax discounts that are linked directly to your earnings. When you go over your work allowance, your council tax rebate decreases, requiring you to pay more in council tax, leaving you with less disposable income to use to repay loans.

Credit Unions provide the path of least resistance for borrowers with bad credit and no job

Credit Unions are community, not-for-profit organisations run by their members for their members. They are regulated by the FCA, and short-term small loans are capped at 42.6% APR in Scotland, England and Wales. It’s the equivalent of 3% monthly interest. Interestingly, in 2012, the DWP (Department for Work and Pensions) commissioned Experian to conduct research into the cost of finance for families on lower incomes (link to the archived downloadable PDF report). That’s what led to an increase from 2% to 3%, which remains the same cap that’s in place today. The objective was to make Credit Unions sustainable for families on lower income.

In Northern Ireland, Credit Union loans are even cheaper with interest rates of 12.68% APR, or 1% monthly. Not all will approve loans to those with bad credit, but they may accept applications for a guarantor loan, or a small loan that’s secured partially against savings held with the Credit Union. As an example, you could pay in £25 a month to a Christmas Savings Club from January, then by July, have £150 in savings (6 x £25 payments). Using that as security, you may be able to borrow up to a 3x multiple without a guarantor, letting you borrow up to £450 at an affordable interest rate.

Until the loan is repaid though, you may not be able to withdraw from your savings as that would be used as security until the loan is repaid. Many will offer an extension, although there are some Credit Unions that limit the number of loans to two or three per year.

Child Benefit loans

Several Credit Unions offer Family Loans based on Child Benefit payments. You can arrange for the DWP to pay your Child Benefit into your Credit Union account and those payments will be used to repay the loan in part, with part of the payments being available to withdraw. To qualify, proof of Child Benefit is used rather than a credit check.

For the most part, loans for people on benefits and with bad credit are best catered to by Credit Unions. Subprime lenders have stricter eligibility criteria and higher interest rates.