What Is It You Need to Be Wary of Loans for Benefits

What Is It You Need to Be Wary of Loans for Benefits?

Low-income working families are struggling to make ends meet, and the threat to their finances seems to continue to lurk until the government gets control over the inflation rate. The scenario is worse in households with a single income source.

Having tried all the harder to keep the wolf from the door, now such households fear that they would collapse at any moment. Although loans are an alternative when you have an emergency, they do not seem to be favourable because of high-interest rates.

Complications grow denser when you lose your job, and your emergency cushion cannot stand your daily expenses. You can seek unemployment benefits, and you will likely be already getting child benefits and incapacity benefits, which form a part of your income that you can use in order to borrow money from an online lender.

Can you get a loan while on benefits?

Any kind of loan, including payday loans, is legitimate as long as they have been designed to help a borrower to tide over rather than make a profiteering business out of them. Being on benefits means you do not have a stable income source, which clearly indicates that you are highly likely to commit a default.

Therefore, getting approval for loans for benefits is quite tough. Does that mean no lender will ever sign off on the application of a loan on benefits? And if so, is the lender trying to make money?

No, in no wise, loans for people of benefits do exist and do not intend to exploit borrowers. Though you are on benefits and you need money for an emergency, a lender would like to peruse your credit report and income statement.

If you do not have a full-time job, you can borrow money provided you have another income source, like a part-time job or anything. In fact, if you have some money coming in by walking a dog, lawn-making or babysitting, you are eligible to use it as your income to take out a loan on benefits.

What benefits do count as your income?

Note that having benefits does not mean that you can escape having a passive income source. However, there are certain exceptions to this rule, and it depends on the type of benefits you are on.

Before you need to put in the loan application, you should know what benefits can form a part of your income.

Benefits that can be regarded as your income
Personal Independence Payment
Incapacity Benefit
Fostering Allowance
Child Benefit
Child Tax Credit
Universal Credit
Industrial Injuries
Disablement Benefit
Disability Living Allowance
Employment and Support Allowance
Benefits that do not add to your income  
Housing Benefit
Job Seekers’ Allowance
Income Support

What do you need to be wary of?

You can get benefit loans from various direct lenders but there are a lot of things you need to pay heed to so you do not find yourself in a debt trap. For instance, reputed online lenders will not approve your application if you are on a pension, and this is for your welfare.

Since the main source of income is pension and you are not able to cover the additional cost from it, it is understood that you will fall into a never-ending debt cycle. Interest to be paid on the debt will be an additional burden on your pocket, but there are some lenders that accept applications from all types of borrowers. You should be wary of them. It is suggested that you do some research beforehand, so you do not end up ruing the day.

In addition, you need to be careful of:

  • Borrowing a large sum of money

These loans have been designed to aim at funding small emergencies. Your tumble dryer may conk out. You may get a medical emergency, and so on. Therefore, the size of these loans is not big. Most of the time, the maximum amount lent is not more than £1,000.

However, you should be responsible while borrowing money. Make sure you will be able to pay back the debt on time. If you suspect your repaying capacity, try to borrow a smaller amount. This will increase the chances of approval. If a lender finds these loans are unsuited to you, not only will you go back empty-handed, but you will also lose your credit score by at least five points.

  • Interest rates

Interest rates of these loans could be higher if your credit rating is not up to scratch. A poor credit rating shows that you do not manage your debt carefully. The lower the credit score, the higher the interest rate will be. Further, it may vary by lenders because of different processing fees and monthly fees charged.

Make sure you research interest rates properly so you do not mistakenly choose an expensive deal. Try to get information about interest rates from their websites or talk to the customer support team. You can also use comparison sites that display average interest rates charged by different lenders.

  • Those who lend without a credit check

Some lenders advertise these loans to be available with no credit check in order to attract bad credit borrowers who are in search of loans without losing a credit score. Beware of such lenders because they may charge very high-interest rates. These loans, then, will work as payday loans.

If you are worried about hard search footprints showing up on your credit report, you should consult a lender that runs a soft credit check. A lender would get to know your credit health, but no hard inquiries will show up on your credit file, which means you will not lose your credit points.

The final word

Loans for people on benefits are not bad loans, but you need to carefully weigh up if they serve your purpose for what you are taking out of them. Try to avoid borrowing a large sum of money,

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