Loans for people on benefits are also referred to as unemployed loans. They are aimed at people who are jobless but are on benefits.
Under no circumstances will mainstream lenders provide you with a loan when you are out of work, but a few direct lenders are out there who are more than willing to consider your situation and give you a helping hand if you need money for an urgent reason.
In brief, the purpose of loans for people on benefits from direct lenders is to help you find your emergency expenses when you are jobless.
How to avail of a loan for people on benefits?
Getting a loan when you are unemployed is very difficult. It is a must for every lender to run an affordability check before giving the green light. They will peruse your credit score and repaying capacity.
You might be wondering why they would check your repaying capacity when you do not have an income source. Not until you have an income source can a lender approve your application.
As you are unemployed, you will not have a full-time employment, but you have to possess another income source. If you do not have a part-time job or income from dividends and interest, your unemployment benefits will be served as your income.
A lender will examine your monthly expenses to see how much risk you can bear. Loans for the unemployed are small emergency loans, so a lender will not ask for collateral. However, they will expect you of a good credit rating. Some lenders might approve despite a poor credit score, but interest rates will be higher.
In some cases, a lender may ask you to arrange a co-signor to offset their risk in lending you money when your credit score is very poor. You and your co-signor both will be on the hook until the settlement of the loan.
What can you use loans for unemployed loans for?
They are small loans typically sought when you have no fixed source of income, so it is unlikely that you will get a larger sum. As you know, it is not a cinch to get the nod for these loans; make sure you apply for them only for valid reasons.
- Small unexpected emergencies
The job loss period could be longer if you do not land a new job as soon as possible. In the interim, you can be caught off guard by emergencies. Unfortunately, they do not estimate your true financial condition before knocking on your door.
Your first priority will be to turn to a savings account. It makes sense to fall back on your emergency cushion because it will help save money on the interest you would otherwise pay.
If your savings lack the proper cash, you can fund the gap with the help of unemployed loans. Because interest will also go out of your pocket, you should avoid borrowing more than you need. For instance, if you need only £100, do not make it to even £101.
- Essential but non-recurring expenses
You can also use unemployed loans for essential expenses, provided they are non-recurring. If you borrow money for recurring expenses like rent, grocery etc., you will never be able to pay the debt off because every month, you will need money to meet that expense.
Use these loans only to meet one-off costs that you cannot put off. For example, your laptop needs to have repaired, and you use it for your job search. However, if you utilise your laptop only for entertainment, do not borrow money due to the “inessential” nature of your expense. You can quickly put it off unless you land a new job.
When you are unemployed, you should strictly say no to your inessential expenses. Otherwise, you will find yourself into a debt trap.
Does your loan purpose matter?
Yes, the purpose of your unemployed loans matters a lot. You will have to disclose the reason behind borrowing money while filling in the application form.
The purpose you state in the application form not only helps a lender to determine the interest rates to be charged but also whether you meet the lending policy of the lender.
While some lenders might be flexible with loaning you, others may restrict you from using the loan for any reason.
For instance, no guarantor loans with no credit check can be used only for unexpected expenses, or personal loans cannot be used for business expenses.
It is always suggested that you state a genuine reason in the application form because if you lie, it will ultimately harm your finances. You will find it challenging to adhere to the payment schedule.
How to decide if unemployed loans are right for you?
Even though you are eligible to take out a loan, you should ask yourself the following questions before signing the agreement:
- Why do you need a loan?
You must know the accurate reason why you want to borrow money. These loans should never be used to meet any inessential or discretionary expenses like buying a computer or a new mobile phone. Take out these loans only when it is urgent.
- What is the cost of borrowing money?
Apart from the interest rates, you should take into account additional fees like monthly fees, late payment fees, and loan origination fees. Compare interest rates to choose the best deal.
- Can you handle the debt?
The next thing you need to look at is whether you will be able to handle the debt. See if you can supervise your monthly expenses along with the debt payment. If the debt is to be paid off in full, ensure you do not fall short of your savings.
Take message home
Loans for people on benefits should be used only to meet emergency expenses. You should never use these loans to meet recurring expenses.
Mark Williams works as one of the Loan Advisors at a direct lender firm, PmLoansDay. He has been working with the lender for about 15 years. He has been known to facilitate his employer in remarkable ways from writing to consulting and whatnot. He is a professional who wants to explore more of the UK financial market, the loan products and how customer requirement changes with time.