Loans for young people and those new to credit

Why loans can be challenging in your earlier years

Young people often face hurdles when applying for loans due to:

• Limited credit history: If you haven’t borrowed money before, lenders won’t know how you’ve previously managed your finances.
• Lower income: Many young people are either studying or working entry-level jobs, making it harder to qualify for certain loans. Lenders may be unsure if you’ll be able to repay your loan if you earn a low amount.
• Lack of assets: Young borrowers typically don't have the same financial assets, like a home, that older applicants might offer as collateral for secured loans.

Types of loans for young adults

Here are some of the most common loan options available to young people in the UK, including students and those with limited credit histories. 

1. Student loans

Student loans are the most common type of borrowing for young people. These loans are provided by the government to help with tuition fees and living costs while you're studying.

• Eligibility: Available to UK residents enrolled in eligible higher education courses.
• Repayment: You only begin repaying the loan once you start earning above a certain income threshold.
• Interest rates: The interest rate is tied to inflation (RPI) and can vary depending on your income and course start date. 

Benefits:

• Repayments are income-dependent, meaning you only pay when you earn a certain amount.
• No need for a credit check, making it accessible for most students.

Drawbacks:

• While student loans don't affect your credit score, they do add to your overall debt, which could impact your affordability for credit in the future. 

2. Credit-building loans

For young people with limited or no credit history, credit-building loans (also known as credit-builder loans) can be a useful way to establish credit. These loans are often small and designed specifically to help build a positive credit profile.

• How they work: The lender holds the loan amount in an account. Each month, you make a set payment with the aim of repaying this loan. Once the loan is paid off, you then receive the money back. It’s similar to a fixed term savings account, but it helps build your credit history. 
• Eligibility: You don't need an existing credit history, but you must show you can afford the repayments.
• Lenders: Credit unions, online lenders, or specialised providers.

Benefits:

• Helps build a positive credit score, improving your chances for future credit.
• Generally easier to qualify for, even with no credit history.

Drawbacks:

• You won’t get access to the loan amount until after the loan is repaid, making this option less useful for immediate cash needs.
• Fees may apply depending on the provider.

3. Guarantor loans

A guarantor loan lets young people with limited credit history borrow money, if they have someone with a good credit record willing to act as a guarantor. The guarantor agrees to make payments if the borrower cannot.

• Loan amount: Typically between £1,000 and £15,000 depending on the lender and your individual circumstances.
• Repayment terms: Usually over 1 to 5 years.
• Guarantor requirements: The guarantor must have a strong credit history and be financially stable.

Benefits:

• Can get access to a loan, despite little or no credit history.
• On-time payments help to build a good credit history in the long run.

Drawbacks:

• The guarantor has to pay the debt if the borrower can’t.
• Interest rates can be high, depending on the lender.

4. Personal loans for young people

Some lenders offer personal loans targeted at younger borrowers, often with flexible terms and lower borrowing amounts.

• Eligibility: You will need to show your ability to repay, typically through proof of income or employment.
• Interest rates: Will vary depending on your credit score and the lender’s criteria.
• Lenders: Banks, credit unions, and online lenders may offer these types of loans.

Benefits:

• Can be used for a variety of purposes, such as buying a car, consolidating debt, or funding personal projects.
• Access to funds quickly if approved. 

Drawbacks:

• If you have a limited credit history, you may face higher interest rates or need to have a guarantor.

5. Overdrafts for students and young people

Many banks offer student or graduate overdrafts with favourable terms. These overdrafts often allow you to borrow money up to a set limit while avoiding interest charges, making them a flexible borrowing option for managing short-term expenses.

• Eligibility: You typically need to be a student or recent graduate.
• Interest-free period: Most student overdrafts are interest-free up to a certain limit, e.g. £1,500, but this can vary between banks.

Benefits:

• No interest on overdrafts up to a certain limit.
• Easy access to funds as part of your regular bank account.

Drawbacks:

• Exceeding the interest-free limit can result in high charges.
• Overdrafts are repayable on demand, meaning the bank can ask for the money back at any time.

Tips for those with limited credit history

Building and maintaining a good credit score is important when applying for loans. Here are some strategies for improving your chances of loan approval:

• Open a bank account: Having a bank account and using it responsibly can help you show financial stability in the eyes of lenders.
• Get a credit card: A credit card (used wisely) can help build your credit history. Keeping your spending below 30% of your credit limit will help improve your rating, and paying off the balance in full each month will avoid interest charges.
• Register on the electoral roll: Lenders use the electoral roll to verify your address and identity. Being registered also suggests stability, and can provide lenders with an added form of security.
• Make payments on time: Timely payments on any existing debts, including mobile phone contracts or utility bills, will improve your credit score over time. 

Should I get a loan as a young person?

Loans can be a useful financial tool for young people, whether you're a student, recent graduate, or someone with limited credit history. However, it’s important to choose the right type of loan for your circumstances.

Whether you opt for a student loan, a guarantor loan, or a credit-building loan, always ensure you understand the terms and conditions, and never borrow more than you can afford to repay.

If you’re unsure about the best option for you, consider speaking with a financial adviser or broker to explore your options and get personalised advice. At Ocean, we can search for a variety of loans that may suit your needs.