Unsecured loans for people on low incomes

An unsecured loan is one where you do not put up your home, car or any other asset as security. If you fail to repay, the lender cannot automatically take a specific possession, but it can add charges, record missed payments on your credit file, pass the debt to a collection agency and, eventually, take court action. Most personal loans, credit union loans and credit cards are unsecured.

For people on low incomes, unsecured credit is often the only kind available, because there is no property to borrow against. This guide explains how lenders decide, why many low-income applicants are refused or offered higher rates, and how to compare options safely in the UK.

How lenders assess an unsecured loan

Without security, the lender relies on two things: your credit history and your ability to afford repayments. Under FCA rules, lenders must carry out a creditworthiness assessment, which includes checking that you can repay without serious financial difficulty. They typically look at:

• your credit file held by the credit reference agencies Experian, Equifax and TransUnion;
• your income, including wages and benefits;
• your committed spending such as rent, council tax and other debts;
• how stable your income is, for example whether you are on a permanent, zero-hours or temporary contract.

A low income alone is not a reason to refuse, but a small margin between income and outgoings often is. Our page on applying for credit on benefits looks at how benefit income is treated.

Check your credit file before you apply

You have a legal right to see your credit report free of charge from each of the three main agencies. Look for:

• accounts you do not recognise, which can be a sign of fraud;
• missed payments that are recorded incorrectly;
• old addresses or financial links to an ex-partner that are no longer relevant;
• whether you are on the electoral register, which helps lenders confirm your identity.

You can ask the agency to correct errors or add a short notice of correction explaining a difficult period, such as illness or redundancy.

Eligibility checkers and soft searches

Each formal application leaves a hard search on your credit file, and several in a short time can make lenders more cautious. Many lenders and comparison sites offer eligibility checkers that use a soft search, which other lenders cannot see. They indicate how likely you are to be accepted and at what rate. Use them before applying, and apply to one lender at a time.

Understanding the advertised rate

Loan adverts show a representative APR. Only at least 51% of successful applicants need to receive that rate; the rest can be offered more. People with a thin or damaged credit file, which is common on low incomes, are more likely to be offered a higher rate than the one advertised. Always look at your personal quote, and compare:

• the APR you are actually offered;
• the monthly payment and the number of months;
• the total amount repayable;
• any fees for paying early or for late payments.

Unsecured options for people on low incomes

Credit union personal loans

Credit unions lend unsecured to members and often take benefits income into account. Their interest is capped by law in Great Britain, making them a natural first stop. See our guide to not-for-profit lenders.

Interest-free public loans

A Universal Credit Budgeting Advance or a Budgeting Loan on Pension Credit and older benefits is unsecured and interest-free, and is repaid from benefits. Our page on state and council social loans explains who qualifies.

Guarantor loans

Some lenders accept applicants with poor credit if another person agrees to repay if you cannot. These loans tend to be expensive, and the guarantor takes a real risk: their own credit file and finances can be affected. Only ask someone who understands this fully and can afford it.

Credit-builder cards and high-cost lenders

Cards for people with limited credit history usually carry high interest. Used carefully and paid in full, they can help rebuild a file, but carrying a balance becomes costly quickly. Payday and other high-cost short-term loans are also unsecured, but their price makes them a last resort.

Do not confuse unsecured with "no checks"

Be wary of anything advertised as a "no credit check loan" or a "guaranteed" unsecured loan. Legitimate FCA-regulated lenders must check affordability. Warning signs of fraud include:

• a fee requested before the loan is paid out;
• contact through social media, messaging apps or unexpected texts;
• a firm not on the FCA Financial Services Register, or one using a name similar to a genuine firm;
• pressure to send your bank or benefits login details.

Note too that a logbook loan is not unsecured: it is secured on your vehicle, which can be repossessed if you fall behind.

When to stop and seek advice

If you are being refused repeatedly, if you need the loan to pay other debts, or if repayments would leave you unable to cover rent, energy or food, more borrowing may deepen the problem. Free advice from Citizens Advice, StepChange, National Debtline or MoneyHelper can help you explore options such as reduced payments, a debt management plan or, in England and Wales, the Breathing Space scheme. Our guide to help with debt hardship explains the next steps.

If you are accepted, keep a copy of the credit agreement and set up repayments to leave your account the day after your income arrives. Should your situation change, for example if your hours are cut or a benefit is reduced, contact the lender straight away. Lenders are expected to treat customers in financial difficulty with forbearance, which may mean reduced payments, a pause or frozen interest for a period. Asking early, before a payment is missed, protects your credit file far better than waiting.