Finding yourself in need of cash while on Universal Credit? You may consider taking out a personal loan tailored specifically for those receiving Universal Credit benefits. With the cost-of-living crisis putting the squeeze on many households, these loans can seem like an easy solution when you quickly need access to extra funds.
But how do Universal Credit personal loans work? Are they a risky form of borrowing or a lifeline for those on benefits?
In this post you’ll learn about interest rates, fees, eligibility criteria, affordability checks, and more. We’ll also provide tips on shopping around for the best loan providers and managing repayments responsibly once approved.
Arm yourself with all the key facts and consider both pros and cons. By the end, you’ll know whether a Universal Credit personal loan is the right solution for your situation or if alternative options may be better.
Universal Credit personal loans allow those receiving Universal Credit benefits to access extra funds through an affordable loan option. If you’re considering a Universal Credit personal loan, this comprehensive guide will provide all the key information you need to make an informed decision.
What is a Universal Credit Personal Loan?
A Universal Credit personal loan is a type of unsecured personal loan available specifically to recipients of Universal Credit. It provides access to a lump sum of money, which is then repaid in monthly instalments at a fixed interest rate over an agreed period, usually between 1-5 years.
Unlike payday loans or other short-term borrowing options, a Universal Credit personal loan allows you to borrow larger amounts of money over a longer repayment term. The funds can be used flexibly – whether for unexpected emergencies, major purchases, or to consolidate existing debts into one manageable monthly repayment.
Who Qualifies for a Universal Credit Personal Loan?
To qualify for a Universal Credit personal loan, you must:
- Be over 18 years old.
- Be a resident of the UK.
- Have a valid bank account and debit card.
- Be named on a current Universal Credit claim and receiving benefit payments.
- Pass affordability checks and credit assessments.
Lenders will assess your income, existing debts and credit history to determine eligibility and affordability. Even if you have poor credit, you may still be approved if the lender feels you can afford the monthly repayments.
The Benefits of Getting a Universal Credit Personal Loan
There are several advantages to choosing a Universal Credit personal loan over other borrowing options:
- Access to emergency funds
The loan provides immediate access to money when you need it urgently. This can be invaluable if faced with an unexpected cost like urgent home repairs or medical bills.
- Cheaper borrowing
Interest rates are capped so are often lower than alternative subprime loans like payday or doorstep loans. This makes repaying more affordable.
- Improve your credit
Making all repayments in full and on time can help build your credit score over time. This will increase future borrowing options.
- Consolidate debts
You can consolidate multiple debts such as payday loans or credit cards into one manageable monthly repayment.
- Smooth out income
The fixed regular payments provide stability if your Universal Credit entitlement fluctuates month-to-month.
- Make major purchases
Larger loan amounts allow you to fund essential household items like washing machines without dipping into your usual benefit income.
How to Apply for a Universal Credit Personal Loan
Applying for a Universal Credit personal loan is relatively straightforward:
- Compare interest rates, loan amounts and eligibility criteria from top lenders offering these loans. Focus on lenders advertising loans specifically for Universal Credit recipients.
- Double check you meet the lender’s eligibility criteria before starting an application. This avoids unnecessary credit checks.
- Have your bank details, Universal Credit award letter, income details and any other requested documents ready.
- Fill in the online or telephone application. It will ask for personal details, income, expenditure and loan amount required.
- The lender will perform affordability checks and let you know if approved. This can take 1-3 days.
- If approved, the loan amount will be deposited into your nominated bank account, often on the same day.
Comparing Lenders and Loan Options
While the eligibility criteria is similar across lenders, compare their Universal Credit personal loan options in terms of:
- Loan amounts – How much you can borrow. Usually £1,000 to £5,000.
- Interest rates – This will impact total cost. Average APR is 35-50% but can vary widely.
- Fees – Check for arrangement fees or early repayment fees.
- Loan term -Duration of 1-5 years. Longer terms have lower monthly repayments.
- Acceptance rate – Some lenders are more likely to accept applicants with poor credit.
- Flexibility – Options to pay off early or pause repayments if needed.
- Online account access – Manage your account online.
Interest Rates and Fees for Universal Credit Loans
Let’s look at the costs involved with a Universal Credit personal loan:
- Interest – The APR on these loans is typically 35-50%. This is because they are unsecured loans for borrowers with lower credit. However, rates are still capped and regulated.
- Arrangement fees – Some lenders charge an upfront fee of around £50-£100 to arrange the loan. Always check if any fees apply.
- Early repayment fees – Will be charged if you repay the loan early. Check if the lender allows early repayments without penalty.
- Late fees – Failure to make repayments on time will incur late payment fees of around £10-£20.
- Credit broker fees – If applying via a credit broker, watch for any broker fees taken from your loan amount. Go direct to lenders where possible.
Pros and Cons of Universal Credit Personal Loans
Let’s weigh up some of the key advantages and potential drawbacks:
- Access to lump sums for major costs.
- Lower interest than subprime loans.
- Manageable monthly repayments.
- Can improve credit rating.
- Consolidate multiple debts.
- Interest rates still relatively high.
- Miss or late repayments incur fees.
- Longer term commitment than other loans.
- Unsecured so no collateral if stop repaying.
- Not accepted by all lenders.
As with any loan, make sure you carefully consider affordability and shop around for the best rates before committing.
Hints for Managing Your Universal Credit Personal Loan
If you are approved for a Universal Credit personal loan, here are some hints for responsible management:
1. Make repayments on time
Set up a direct debit to avoid missed payments and late fees. Even being a few days late can incur charges.
2. Overpay when possible
Paying a little extra each month will reduce the overall interest paid and allow you to clear the loan early.
3. Avoid cash advances
If your loan offers cash advances, try not to use this very costly feature. The interest rate will be much higher.
4. Contact lender if struggling
Speak with your lender immediately if you are struggling to make payments. They may offer reduced payments or a payment holiday to get you back on track.
5. Use loan responsibly
Only spend the money on planned expenses. Avoid being tempted into unnecessary purchases.
Alternatives to Consider
While a Universal Credit personal loan has its advantages, also consider alternatives such as:
- Budgeting loans – Government loans for certain costs like furniture or maintenance. Interest-free repayments are deducted from your Universal Credit.
- Credit union loans – For affordable loans from not-for-profit cooperatives. Rates are capped at 42.6% APR.
- No-interest loans – Some schemes like Fair For You offer essential items on credit without any interest being charged.
- Borrow from friends/family – For small amounts, consider borrowing informally from people you know before taking on an expensive loan.
Universal Credit personal loans allow those on benefits to access lump sums for major costs through regulated lenders. While the interest rates are higher than mainstream loans, they provide an affordable borrowing option if used sensibly.
Shop around for the best deals, carefully consider affordability and make repayments on time to get the most benefit. Used wisely, they can provide useful access to emergency funds.