Credit Building > How to get a loan if on benefits and have bad credit

How to get a loan if on benefits and have bad credit

Wollit Team2 minute read · Updated 1st July 2024

Are you struggling to get a loan in the UK because of a bad credit score and being on benefits? You’re not alone. Many people in the UK face this challenge, but options are available. Let’s look at the different types of loans, their pros and cons, and how to improve your chances of getting approved.

Does being on benefits affect my credit score?

No, benefits do not directly count towards your credit score in the UK. Your credit score is based on your credit history, which includes factors like:

Payment history on credit accounts like loans and credit cards;
Credit utilisation (how much of your available credit you are actually using);
Length of credit history;
Types of credit used;
New credit applications;
And adverse events like bankruptcies or CCJs.

Benefits such as Universal Credit, Jobseeker’s Allowance, Disability Living Allowance, etc., are not considered credit accounts and do not show up on your credit report.

However, if you fall behind on bills or loan repayments while relying on benefits, that can hurt your credit score.

Also, if you are entirely dependent on benefits, lenders may also see you as a higher risk. This doesn’t necessarily affect your credit score, but it is a factor in their lending decisions.

What are my options?

To get a loan in the UK when you’re on benefits and have a bad credit score, you have two main options:

Get a “loan for people on benefits” or even a “bad credit loan”. The downsides are that the amounts are small, the interest rates are very high, and, in most cases, also require a guarantor.
Or get an advance on your benefits from the UK government. These are loans given by the UK Government to help you cover emergency costs, and you repay them back from the benefits. The amounts are also small, but they come interest-free and have a decent period in which to pay them back.

How do UK Government loans for people on benefits work?

These loans, also called “advances”, come in two types.

The first is called Universal Credit Advances:

These are advances on your very first Universal Credit payment.
To get it, just apply online through your Universal Credit account.
Repayments are taken from your Universal Credit payment over 24 months, with possible 3-month delays in exceptional cases.

The second kind of loan is called Budgeting Advances:

You can apply for one only once you’ve already started receiving benefits. You must have received Universal Credit for more than six months.
They’re meant to help you with emergency costs, getting a job, or staying at work.
You’re eligible if you’ve earned less than £2,600 (or £3,600 for couples) in the past six months.
You must also have paid off any previous Budgeting Advances.
The amount you can borrow is not very high: £100 to £348 (single), £464 (if you’re married), or £812 (if you have children).
Once you receive the loan, you have 12 months to repay it.

How can I get better loans?

Neither Budgeting Advances nor bad credit loans from direct lenders are good enough options if you’re on benefits. However, the Budgeting Advances do come out ahead – at least you’re not saddled with interest that you might not be able to afford to pay.

In the long term, though, you should aim to improve your credit rating so you can eventually become eligible for better products like loans, cards, and mortgages – especially if you don’t plan on staying on benefits forever.

One of the more affordable and safe ways to do it is by downloading a credit-building app like Wollit.

Wollit reports your fixed fee monthly subscription as a loan repayment to credit reference agencies (Experian, Equifax, and TransUnion).

This helps you improve your credit history by showing that you can pay debt on time, which is one of the main factors that goes into your credit score.

On top of this, Wollit can also report your monthly rent payment to Experian, adding another line in your credit report that shows lenders you pay your bills on time. Eventually, this will help you get the loans you want on the terms you want, especially once you exit the Universal Credit system.