As a young person, you might find yourself looking at loan options long term or just to 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, it’s never good to get into debt particularly at a young age. 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 and compare loans
that are accessible to young people.
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 usually unwilling to allow you to borrow money, as they don’t know whether they be able to trust you to pay it back.
What is a credit score and how does it affect you?
If you lack a financial history, you might have a poor credit score. 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). Although different ratings agencies will have different ways of doing it, a general rule of thumb is the higher you score the better your rating will be, and a good credit score is important. Lenders will determine whether to lend to you, and how much interest to charge based on your credit score. These can stay with you for a long period so it’s important to bear this in mind, the financial decisions you make now can affect you much later on in life. To that end, we’ll take a look and compare loans
on offer to young people to help you make an informed decision.
How can I Improve my credit score?
The simple answer to this is to borrow money. 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. Obviously don’t borrow if you cannot afford to pay it back, but if you can it’s a good way of building your rating. 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.
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.
As a young person with poor credit, a potential 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 better rates, as they feel comfortable that they will get their money back. It’s important to make sure your guarantor knows the risks of what they are signing up for.
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. Even if you’re not a student, the daily fees are normally less than other forms of borrowing, just remember to pay it back quickly!