You do not always need a guarantor to qualify for a loan when on benefits, but it largely hinges on a lender’s policy, the type of loan, and your financial circumstances. Some lenders accept benefits as income, while others require a guarantor to reduce their risk.
What are loans on benefits?
Loans for people on benefits are small emergency loans aimed at helping people tide them over during emergencies. Unexpected expenses can crop up at any time. After losing your job, you rely on your savings and benefits to meet essential expenses. No matter how hard you stretch your money, you might struggle to have sufficient cash to pay for the unforeseen. In this situation, you can take out a loan for benefits.
While you are unemployed, it does not insinuate that you do not have any income source to prove your repayment capacity. No lender is authorised to lend you money until they are certain about your repayment capacity, for which you must have some sort of income.
Since you do not have any regular income, you should have a side gig or a passive income source. This includes:
- Babysitting
- Pet walking
- Pet sitting
- Uber driving
- Freelance income
Lenders will consider your passive income to determine whether or not you are in a position to discharge your debt on time. However, not everyone is lucky enough to have a side gig. In that case, benefits will be regarded as your income.
After becoming redundant, the first thing you should do is to apply for unemployment benefits. If you have been receiving other benefits such as child tax credit, child benefit and universal credit, they can also be treated like your income.
You must bear in mind that there are certain benefits that cannot count as your income:
- Income support
- Pension credit
- Housing benefit
- Jobseeker’s allowance
Loans for people on benefits charge high interest rates and are repaid in one fell swoop. There is a huge risk of falling behind on payments.
When do you need a guarantor to get a loan for people on benefits?
Applying for loans on benefits is not a cinch. A lender will have to review your credit report and income sources to ensure that you will not struggle to keep up with the payments. Since these loans are discharged in full on the due date, it can be quite challenging to have sufficient cash to repay them. The repayment term for these loans is not more than a month.
While it is not always necessary to arrange a guarantor to qualify for loans on benefits, lenders may demand it in the following circumstances:
- Your credit score is abysmal, which clearly shows that you never managed to repay your debts on time.
- Your credit score is lower than the bare minimum score that a lender considers to accept applications.
- Your side income source is not enough. Lenders are sceptical about your repayment capacity.
When lending money to you involves a huge risk, a lender would require you to arrange a guarantor. The guarantor must have a good credit rating and a good repayment capacity. This is because a lender would call on them when you fail to pay back your debt.
Here are some facts about arranging a guarantor:
- A guarantor will be responsible for clearing the debt when all means of recovering money from you have been exhausted.
- Non-payment will take a toll on the guarantor’s credit rating even though they have discharged your obligation in full.
- Your negligence can strain your relationship with the guarantor as well.
Things to consider while applying for loans for people on benefits
While applying for loans on benefits, you must ensure that you can repay the debt on time. As these loans are not paid down over an extended period, it is vital to carefully assess that you will not struggle to pay for your essential expenses. Do not forget that you have to pay interest on top of what you borrow.
The whole amount will be paid out of benefits and savings, which means your funds will quickly drop. This could make it challenging for you to meet essential expenses in the days to come. As a result, you will end up getting caught in the ongoing cycle of borrowing. Eventually, you will sink into an abyss of debt.
- You should avoid borrowing money when it is not urgent, or it can be put off.
- Try to cut back on regular spending so you can stretch your money.
What if you are refused a loan on benefits?
Even though you arrange a guarantor, there is no guarantee that you will be signed off on. Lenders will consider your overall financial condition, and if they find that you are a risky borrower, they will straightaway reject you. Sometimes, arranging a guarantor is not enough to receive approbation.
In this situation, you should consider the following steps:
- Try to consider borrowing less money. Maybe you were borrowing more money, which led to the rejection of your application.
- If you are arranging a guarantor, the guarantor’s repayment capacity should also be strong. It is likely that they will not be able to settle your dues if you fail to repay the debt.
- Consider borrowing money from your friends and family. You do not have to pay interest to them, and it will not be as high as lenders charge. You can also ask for an extended period to pay it off, for instance, after you land a job.
The final word
When you are on benefits and need a loan, you do not always have to arrange a guarantor. A guarantor is required when your repayment capacity does not seem to be good. With the help of a guarantor, your chances of qualifying for a loan are quite high, as it reduces the risk for the lender.
If you choose a guarantor, make sure that you both understand your commitments. Otherwise, you will have to bear the consequences.
