Managing your personal finances is an essential skill that can empower you to achieve your goals and ensure financial security.
For young people, traversing the world of personal finance, loans, and credit can be both exciting and overwhelming when just starting out.
Whether it’s getting through higher education, seeing through the business idea you’ve dreamt up, or buying your first home, loans can provide a welcome financial boost to turn your ambitions into reality.
To help you handle your finances as an adult, we will explore the ins and outs of loans for young people.
Ever wondered what various types of financing you could be pursuing as a person in the early stages of your life? Read on!
Getting a loan as a young person
Getting a loan as a young person in the UK is becoming more normal, as there are many lenders on the market these days who are willing to lend a hand to young borrowers.
Despite the loan products usually being universally available, searching for the credit you need can have some unique aspects compared to older individuals.
There are a few essential points to consider whilst conducting your research.
Limited credit history
For a variety of reasons, young people often have limited or no credit history at all.
Up until this point in your life, you may have had utility bills paid on your behalf, or never needed to take out a credit card.
As analysing your past behaviour surrounding managing finances is an important aspect of a lender’s evaluation process, your limited credit history can sometimes throw a spanner in the works when you apply for a loan.
This is because it can be challenging for lenders to assess your overall creditworthiness to decide whether to offer you a loan.
What’s more, without a credit history, it can be harder to secure a loan or obtain favourable terms for any financing you take out.
To overcome this barrier, you might consider getting a credit builder card, or taking on some responsibility for paying bills and council tax, for example.
Together, these actions can work to give you positive notes to add to your credit report, helping your case as a borrower in the future.
Higher Interest Rates
Due to a lack of credit history and the higher risk which can be associated with young borrowers, lenders might charge you higher interest rates on any loans you take out with them.
This higher cost for you compensates them for the increased risk they assume when lending to you, if you are a young person with limited a track record surrounding personal finances.
Even though this is an unfortunate aspect of borrowing as a young person, this won’t last forever.
Once you’ve built up some positive credit use, the interest rates should begin to drop when you take out new products.
Guarantor or Parental Involvement
As much as you want your independence, drafting in an older adult can work wonders in the loan acquisition department.
In a lot of cases, youngsters may need a guarantor, such as a parent or guardian, to co-sign on a loan you request from a lender.
Having a guarantor on board provides an additional layer of security for the lender you work with, as your parents or guardian agrees to be held legally responsible for the loan repayments if you fail to make them.
Ultimately, having a guarantor can increase the chances of your all-important loan approval and potentially result in you being offered more favourable terms.
Limited Loan Amounts
Lenders perceive young people to be higher risk borrowers. It’s an unfortunate fact of life.
That’s not to say that they don’t trust you, but lending institutions are notoriously risk averse, and need to cover their backs in the event that you don’t pay them back.
As a young person, you might face extra restrictions on the maximum loan amount you can borrow from a lender.
Financial institutions are likely to be extra cautious about extending substantial credit to those who are just beginning their financial journey. This is due to your lack of experience in managing loan repayments.
As you’re early on in your career too, your income may also be fairly low, which doesn’t help instilling confidence in your ability to keep up with repayments.
Crucially, the loan amount available to you may be diminished in comparison to someone older who has a longer credit history and has established financial stability throughout their life as an adult.
It’s vital to remember that your eligibility for the best rates should improve over time if you manage your money like a pro.
Building Credit
As we mentioned earlier, many young people decide to build their credit score through using credit products.
Taking out a loan as a young person and consistently making repayments on time can help you build a positive credit history and extend the length of your credit record.
In summary, to improve your chances of getting a loan with great terms as a young person, it’s advisable to:
- Start building credit as early as possible by using a credit card responsibly or taking on little loans which you can comfortably manage to pay back.
- Pay all bills and debts in good time to avoid negative marks on your credit report in the long run.
- Consider seeking accredited financial guidance from professionals, or utilising online resources (like our other articles, for example…) to understand the types of credit and gather tips personal finance management.
- If it seems like a good option, explore the possibility of securing a loan with a guarantor, or with the assistance of a parent or guardian.
- Be sure to compare loan offers from different lenders to find the best terms and interest rates you can get.
What loans are on offer for young people in the UK?
Loans come in many shapes and sizes.
In the United Kingdom, there are a variety of loan options available which are specifically designed to meet the financial needs and credit stature of young people.
Each loan type can be used for different purposes, so you’re likely to find a good fit once you’ve searched around.
Student Loans
The British government backs student loans to help young people cover tuition fees and living costs when undertaking any higher education.
These loans typically have very favourable and flexible repayment terms and are only required to be repaid once your income hits a certain sum.
Depending on when you took, or will take, one out, the interest rates are generally on the forgiving side, meaning the financial burden of student loans month to month is easy to manage
Young readers, you can apply for personal loans from banks and other financial institutions just like older individuals!
Yes, there may be more hoops to jump through to prove you’re creditworthy, but getting some lender support to boost your finances via a personal loan isn’t an impossible feat.
These loans are often unsecured, meaning they don’t require you to put up any collateral. This can be great if you’re an asset-less twenty something.
They can be used for various purposes, like funding a car purchase, covering travel costs, or consolidating any debts you already have lingering.
The loan terms, interest rates, and eligibility criteria vary between lenders, but can be stricter if you don’t have much by way of credit history.
Graduate Loans
Some banks and other lenders have created specific loan options for recent graduates as part of their product offering.
These loans are designed to help graduates to manage their finances as they transition from education to permanent, or freelance, employment.
Because they’re designed to help those just staring out in adult life, they are likely offer lower interest rates or flexible repayment terms which are tailored to the your circumstances as a young person. Ideal, right?
Start-up Loans
Just because you’re young, it doesn’t mean you can’t be entrepreneurial! Lenders recognise this fact.
If you’re an aspiring young business owner looking to set up shop, you can explore start-up loans directly aimed at your demographic.
These loans are designed to provide capital for business establishment and short-term growth.
For example, the UK government’s Start-Up Loans program offers funding, mentoring opportunities, and general support to help you young entrepreneurs kick-start your next venture.
Guarantor Loans
Let’s recap on the guarantor loans mentioned earlier!
Young people with limited credit history or low credit scores, listen up. You may be able to get your hands on a guarantor loan.
These loans require a co-signer, and people usually choose a family member or close family friend with a great credit score and financial history to boot.
They guarantee the loan repayments, promising the lender that they’ll come through with the required funds if you fail to make payments.
Guarantor loans can help you access credit and ultimately improve your creditworthiness over time by making responsible payments.
Credit Builder Loans
For you young people out there who are aiming to establish or improve your credit history, credit builder loans or cards can be highly beneficial to your future money goals.
These credit products are specifically designed to help you generate a positive credit record by borrowing a small amount and making regular repayments over a fixed term.
If you can prove you’re equipped to handle them responsibly, this can be great for any loan applications you make in the future.
Overall, it’s essential for to carefully assess your financial situation before you take on any credit. It can be great for your score if you play your cards right and manage the credit well, but can also add negative marks to your file if you’re unable to handle the loan responsibly.
A good way to ensure you can stay on track is to develop an understanding of the terms and conditions of each loan option you find and compare interest rates and repayment terms before applying for any products.
Additionally, seeking professional advice from financial advisors or using online resources provided by trusted financial institutions, or even the government, can help you make informed decisions about which loan best suits your needs and financial goals.