As a young person, you might find yourself looking at personal loan options, whether that's long-term borrowing or just something to help you make it to the end of the month. First and foremost, it's important to note that if you can avoid getting a loan you should - getting into too much debt can cause long-term cashflow issues.
If you really do need a loan, there are options available to you even with a limited credit history. This guide will outline the process of getting a loan that's accessible to young people.
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Getting a loan as a young person
Getting a loan as a young person can be difficult for the simple reason that a lender does not know enough about you. The younger you are, the less financial history you will have. This means that your credit rating can be poor and that lenders are often less willing to allow you to borrow money, as they don't know whether they can trust you to pay it back.
What is a credit score and how does it affect young people getting a loan?
A credit score is like a financial CV. Credit Ratings Agencies will look at the history of your financial interactions and give you a numerical score (usually between 1 - 1000). Lenders will determine whether to lend to you, and what interest rate to charge based on your credit score. For instance, if you take out a credit card to make some purchases and then fail to make your monthly minimum payments, your credit rating will likely be negatively affected. Likewise, if you take out a payday loan and build up a lot of debt due to the interest rates, your rating will probably go down.
Although different rating agencies will have different ways of calculating it, the higher you score the better your rating will be, and a good credit score is important.
If you lack a financial history, you might have a bad credit score, and this is why it can be a barrier for younger borrowers.
How can I improve my credit score as a young person?
The quickest way to do this is to borrow money and pay it back, ideally promptly. If you pay any money you borrow back promptly without missing any minimum payments, then your credit rating should improve.
By doing this regularly you will build up a positive credit history, and the more borrowing history you have, if you pay it back in time that is, the more positive information a lender will have about you.
Another easy way of building your score is to make sure your name is on the electoral register.
Finally, make sure you space out your applications for credit as much as possible. If you have a lot of requests in a short space of time the lender is less likely to accept as it may look like you're being repeatedly turned down.
Do not borrow if you cannot afford to pay it back, and we recommend you steer clear of payday lenders with higher interest rates; it is easy to get trapped into debt with these lenders.
What types of loans are available for young people?
As a young person with a poor credit score, one option would be to take out a guarantor loan. If you have a family member or good friend with an excellent credit history, they can act as your 'insurance' on a loan. Essentially this means that they sign up to pay off the debt should you be unable to.
Lenders will usually prefer this and give you a lower interest rate; a loan with a guarantor is more secure so they usually feel more comfortable that they will get their money back.
It's important to make sure your guarantor knows the risks that they are signing up for. Furthermore, your ability to access this type of credit will largely depend on your guarantor's credit rating.
The most common loan for a young person is a student loan. Although you can take out a personal loan to pay for your tuition, the most common, and better option is to take out a loan with the government. Government loans will normally come in two forms, one will be for tuition, and one will be in the form of maintenance.
The benefits of these loans are that you do not have to pay them back until you earn over roughly £21,000 a year, and the interest payments that accrue on them are usually well below market rates. This means that despite the possibility of building up quite a bit of student debt, it is made more simple and manageable to pay off than a conventional personal loan.
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Alternatives to loans for young people
One alternative to a loan for young people is a credit card.
Credit cards allow their user's to make purchases on credit. If you pay this credit off (or at least a good portion of it) monthly, you will be able to build up your credit rating quite quickly.
A credit card is usefuly to keep on hand for emergencies and online purchases, but they can be dangerous; it is easy to make purchases with one and build up a lot of credit, on which interest will have to be paid after a month. If you make your monthly repayment however, and don't borrow too much, this is a viable method of borrowing money as a young person.
If you are just looking to borrow a small sum of money to keep you going, an authorised overdraft is probably the best option.
If you are student, your current account will often have an option for a fee-free overdraft for a certain amount of time and money.
If you're not a student, the daily fees are normally less than other forms of borrowing, just remember to pay it back quickly! Overdrafts do not usually have an interest rate, like other forms of credit, rather banks will usually charge a daily fee each day you enter it.