Loans for young people

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Loans for young people

Chances are you’ll have had little experience of managing a regular income, applying for credit or paying back debts. As a result, you won’t have had the chance to build up a credit history.

Lenders like to see a track record of being financially reliable before approving a loan. If you have no credit history, they can’t judge whether you’re a safe pair of hands. That’s why it can be difficult for a young person to get accepted for a loan.

There are things you can do to maximise your chances of acceptance, though. Plus, there are alternatives to loans you might want to consider too.

What type of loans are available for younger people?

Take a look at:

  • Student finance and Master’s loans - These can help pay for your university tuition fees and living costs
  • Unsecured personal loans - Only available to people aged 18 or over. However, the chances of getting approved for one can be low if you have no credit history or regular income. If you’re accepted, you can expect high interest rates
  • Guarantor loans - With this type of loan, a family member or friend who has a better credit rating co-signs and agrees to be responsible for paying the debt if you can’t keep up with repayments. If you have poor or no credit history, some lenders will insist on a guarantor before they’ll lend to you
  • Bad credit loans - For people with a poor credit score or little financial history. Interest rates can be extremely high and you could end up paying a huge amount more than what you initially borrowed
  • Car finance - Allows you to pay off the cost of a car in monthly instalments
Young adult woman looking at her phone and laptop with her credit card

What is the minimum age to get a loan?

You’ll usually need to be 18, although some loans require you to be aged 21 or older.

What are the pros and cons of taking out a loan as a young person?

Before applying for a loan, consider:

Pros

  • A loan could help you get fast access to money to pay for an emergency car repair or replace a damaged mobile phone, for example
  • Repaying your loan on time can build up your credit score, which could help you access better rates on credit in the future, like a mortgage

Cons

  • You’re unlikely to be offered the best interest rates, which can make the loan more expensive overall
  • Defaulting on the loan (failing to make your repayments) will damage your credit rating and the lenders could take legal action against you
  • A loan is a serious commitment which could leave you struggling financially especially if your circumstances change, like if you lost your job. You could be left in a worse situation than before

Your credit score and how it affects you

A credit score is a figure created by a credit reference agency (CRA) that reflects your financial history.

A higher credit score means you’re financially reliable and less of a risk to lenders. Therefore, you’re more likely to be accepted when you apply for credit and get access to better deals and interest rates too.

Many young people have never taken out any form of credit, like a credit card, overdraft or utility company contract. If that’s the case for you, you won’t have had the chance to build up a credit history yet.

So, a lender has nothing to judge you on when it comes to deciding on whether to give you credit, which means they’ll be more cautious.

What loans are out there for people with no or a low credit score?

If you have no credit score, it means you don’t have a credit history, usually because you haven’t taken out any form of credit before. Many young people fall into this category.

People with low credit ratings likely have a history of being unreliable when it comes to paying back money. They may have defaulted or been late with payments, and their credit score will have suffered as a result. Another reason could be because they’ve applied and been rejected multiple times for credit previously.

Having no credit is slightly better than having poor credit. It’s easier to build your score up from scratch rather than rebuild credit that’s taken a knock. However, both situations make getting loans with reasonable rates tricky.

This doesn’t mean you can’t get a loan, but it does limit your options.

Lenders who do offer loans to those with a low credit rating, or none at all, will usually offer higher interest rates and lower loan amounts.

How young people can improve their credit rating

There are a few things you can do to improve your credit score as a young person.

  1. Keep up payments

    If you do get credit, make sure you can afford to keep up with the repayments and pay them on time. This helps to gradually build up your credit score. Missed or late payments go on your record, lowering your credit rating and can indicate to lenders that you may struggle to manage financially

  2. Space out your applications for credit

    Each application will leave a 'footprint' on your file. Frequent applications will put off lenders and lower your score

  3. Use a soft search first

    Try to check your eligibility for a loan or other type of credit using a soft search before applying. This means it won’t negatively impact your credit score

  4. Register on the electoral roll

    If you’re not already on it, get on the electoral register. Lenders like to know that you have a fixed place of residence

Business loans for young people

The Prince’s Trust works with the Start Up Loans Company to offer low-interest personal loans of between £500 and £25,000 to applicants aged 18 years or over for business purposes.

Alternatives to loans for young people

A loan may not always be the best way to borrow money. If you can, try to save up so you don’t have to get into debt at all.

Young people could also consider:

Overdrafts

You could ask your bank for an interest-free overdraft, or to extend one you already have.

If that’s not available, be wary of using your overdraft as fees tend to be steep.

0% credit cards

Choosing a 0% purchase card can provide you with free borrowing for a period. Try to keep within 30% of your credit limit and make at least your minimum monthly payments to maintain the 0% interest offer. Just make sure you pay off the debt before the introductory period ends as you’ll start paying interest, which can quickly become expensive.

Student credit cards

Some banks offer student credit cards to student bank account holders. When used responsibly, they can help build a credit history from scratch and can be useful to cover emergency expenses. Try spending small amounts and paying off the balance in full each month to make the most of your card.

Credit builder credit cards

If you don’t have a history of borrowing, using a credit builder card sensibly can help. These cards typically offer a lower credit limit and higher interest rate than cards that are available to people with healthier credit scores. If you don’t pay off your balance in full each month, it can get expensive really quickly.

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