Types of loans for people on low incomes

On a low income, the kind of loan you choose matters as much as the decision to borrow. Some products are built for small budgets, with capped costs and a lender who looks at your whole situation. Others are easy to get, expensive and designed to keep you borrowing. This section explains the main loan types, what they cost and which ones to steer clear of.

Loans designed for small budgets

Credit union loans come from member-owned, not-for-profit lenders whose rates are usually capped and well below those of high-cost lenders. Many accept people on benefits or part-time work and encourage you to save a little alongside your repayments. No-interest loan schemes, run by charities and community lenders in several countries, let you buy essentials such as a fridge or school laptop and repay only what you borrowed: see our guide to interest-free loans. In the UK, Budgeting Loans and Budgeting Advances are interest-free and repaid from future benefit payments.

Community and charity lenders

Community lenders and charities also offer nonprofit loans and social loans, often with budgeting support included.

Loans to use with care

• Guarantor loans: a friend or relative promises to repay if you cannot. Rates are often high, and a missed payment can damage your relationship as well as their finances.
• Car finance: it can make sense when a car is the only way to get to work, but compare the total cost including insurance, and avoid stretching repayments over the life of the car.
• Loans from family: flexible and cheap, but put the amount and repayment dates in writing. Our page on family loans explains how.

Credit to avoid

Payday loans, doorstep lending, rent-to-own shops, logbook loans and repeated buy-now-pay-later purchases are the products most likely to trap a tight budget. Even where prices are capped, rolling one loan into another quickly costs more than the original need. Our page on urgent loans covers safer options when money is needed fast. Never deal with "lenders" who contact you on social media or ask for a fee before releasing the money: these are scams.

How to choose

1. Check first for help you do not have to repay: benefits you may be missing, local council or welfare hardship funds, supplier hardship schemes and charities.
2. Borrow only the exact amount you need.
3. Work out a repayment you can afford after rent, food and bills.
4. Compare the APR and the total amount repayable, not just the weekly or monthly payment.
5. Prefer a lender that offers support, such as a credit union or a community lender, if your budget is tight or your credit file is poor.

If you are already behind with repayments, a new loan usually makes things worse. Speak to a free debt adviser before borrowing again.

The pages below look at each loan type in detail.