Loans for Young People

 

As a young person, you may find yourself in a position where you need to borrow money. This could be to fund your education, cover the cost of a car, pay for a rental deposit, or an emergency. But it can sometimes be difficult to secure a loan. You may have no established income and your credit history may be brief to non-existent. Both of which can make lenders view you as a financial risk.

 

That doesn’t mean you don’t have any options though. In this guide, we’ll explore the types of loans available to young people and what you can do to improve your chances of securing a personal loan.

 

How do young person loans work?

 

Loans for young people are personal loans that work in very much the same way as loans for older borrowers.

 

You’ll borrow an amount of money, called the principal amount, say £5,000. You’ll repay the principal amount with regular repayments, usually monthly repayments. As well as the principal amount, you’ll pay interest on your loan. Interest rates will always vary based on your reason for borrowing, the amount and term of the loan, and your perceived ability to pay back the loan.

 

Interest

 

When you make your monthly repayments, you’ll typically pay both a part of the principal amount and interest. Most personal loans have fixed interest rates, but some loans may have interest rates that change over time. Because you’ll pay interest on a loan, you’ll repay more than just the principal amount you borrowed.

 

You’ll often see the interest rate of a loan written as APR, which stands for Annual Percentage Rate. This is the interest rate and any additional charges you’ll pay in addition to the principal amount.

 

Repayment

 

With a loan, you’ll also have a repayment period, which is the time you have to repay the loan, such as five years of monthly repayments. Most loans, including loans for young people, may feature early repayment charges, where you face charges for paying off a loan early.

 

Unsecured loans

 

Young person loans are usually unsecured loans, which means you won’t have to secure your loan by borrowing against a valuable asset, like a property. However, you may have to provide a guarantor for your loan, which is someone who agrees to repay your loan if you can’t, usually a parent or close relative.

 

Understanding loans

 

The language used around young person loans can be complicated, but our Asda Money financial jargon buster can help cut through the confusion and make loans easier to understand.

 

To help make loans even clearer, use our helpful loan calculator. Simply add different loan amounts, interest rates and repayment periods to understand how much you’ll have to repay in total and what your monthly repayments would be.

 

How does taking out a loan as a young person work?

 

You’ll apply for a loan as a young person just as you would for any other form of personal loan.

 

You’ll have to begin the process by making an application to a lender, such as a bank or a student finance company. This typically involves completing a form, either online or on paper and may involve an interview with the lender. You’ll be asked to provide the personal details required for the lender to judge how much of a financial risk you are.

 

The lender will typically run a credit check on you. They’ll submit a request to a Credit Reference Agency, such as Experian or Equifax, to ask for a credit report that will detail any money you’ve previously borrowed and how reliably you paid it back.

 

A decision will be made on whether or not you’re a suitable financial risk for the lender. If you’re offered a loan, your interest rate, repayment period and monthly repayments will be finalised.

 

What loans can a young person get?

 

As a young person, you’ll have a range of loans available to you, including:

 

• Student loans: To cover tuition fees and living costs. Most student loans in the UK are provided by the Student Loans Company, whilst many banks also offer loans for Master's degree students.

 

• Personal loans: Personal loans tend to range from between £500 to £25,000, even up to £50,000. At Asda Money our panel of lenders offer personal loans from £1,000 to £25,000.

 

• Guarantor loans: Like personal loans, except a guarantor agrees to repay your loan if you can’t. A guarantor is usually a parent or other close family member with a good credit history.

 

• Car loans: A personal loan where you use the funds to pay for a car or to put down a car deposit.

 

• Holiday loans: Personal loans to help you finance your dream holiday. Pay for your holiday up front and then pay the loan off in instalments.

 

• Home improvement loans: Whether you want to give your home a fresh lick of paint or pay for a new kitchen, a home improvement loan will help pay for it up front.

 

• Wedding loans: A personal loan to help you pay for some or all of the costs of your wedding.

 

Why is it harder for young people to take out loans?

 

Young people can find it difficult to secure loans for a variety of reasons. One simple factor is that they may just be too young for some lenders. The minimum legal age to take out a loan is 18, however some loan providers will only lend to customers above a certain age. Often this is 21 or over, or even 25 and over.

 

Young people often also lack the earnings and assets required to secure a loan. Younger customers typically have limited to no credit history, which lenders use to judge the financial risk of a potential customer. Without a credit history, lenders may reject a loan application purely because they don’t have enough information to make a judgement.

 

How can a young person improve their chances of getting a loan?

 

The best way to improve your chances of getting a loan is to improve your credit rating. You can do this by:

 

• Registering on the electoral roll: Making sure you’re registered at your current address can immediately improve your credit rating. It means lenders can confirm your address when you make an application.

 

• Making sure all bills are registered at the same address: Ensure that every bill you pay is sent to the same address as the one on the electoral register.

 

• Taking out credit and paying it back on time: If you have little to no credit history, you may have to start small and take out lower amounts of credit, like a credit builder credit card. By making sure you pay your bills on time, you can improve your credit score.

 

• Spacing out your credit and loan applications: Each application for a credit card or a loan will show up on your credit report. It can lower your credit score if you make frequent applications, especially if any of those applications are rejected. Lenders may also think you’re having money problems if they see too many applications in a short space of time.

 

• Make eligibility searches first: Check your eligibility for a loan before you apply, as eligibility checks typically involve ‘soft searches’ that will leave less of an impact on your credit report.

 

How do I pay off the loan once I get one?

 

Once you receive your loan, you’ll be given a detailed repayment plan. It will illustrate how much you’ll need to repay each month and for how many months until your loan is repaid. You can agree the exact monthly payment day with the lender, so it makes sense to choose a day after you’ve been paid to ensure you have the funds available each month.

 

Set up a direct debit for your monthly loan payments so you don’t miss any, as missed payments can harm your credit score. Missing payments may also mean you have to pay penalty charges.

 

Once you’ve made your final payment, you’ll have cleared your loan and you’ll no longer owe any money. Your loan will be shown as paid in full on your credit report.

 

Find your ideal loan with Asda Money

 

At Asda Money, we’re here to help you find the right loan for you from our panel of trusted UK lenders. You can check your eligibility without it affecting your credit score.

 

To understand more about loans and your finances, we also offer free and impartial advice and support on all things money through our Financial Support. Whether you need help understanding terms with our jargon buster or you want to check your financial health, we’re here to help.