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Loans for young people

Tom Martin
Written by Tom Martin, Content editor

Edited by Marianne Curphey, Finance Writer, 31 January 2022

Whether you need extra financing for your studies or trip abroad, getting a loan when you're younger can be difficult. Our guide explains ways to borrow loans for young people.
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Loans for young people
Loans for young people

Getting a loan when you are young person can be difficult because you have no track record of borrowing and no credit history. Lenders are wary of giving credit to young people because they do not know how reliable you are financially. That said, it is possible to get a loan as a young person, and there are a number of forms of credit available to young adults.

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Bad credit? Been refused credit in the past? You can still find a loan without resorting to payday lenders

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What loans can a young person get?

Aside from a student loan, it may be possible for someone aged 18 or over to get a loan. However, not all financial companies will be prepared to loan to you and the interest rates may be high.

Aside from a student loan, which is underwritten by the government, young people can struggle to borrow partly because they could be seen as more of a risk or do not yet have a steady income. Also they often don't have much experience in paying back debt yet.

On the other hand, if you have experience with credit cards and you can show a track record of paying back debts, and you have a regular income, then you may be considered for a personal loan.

If you don't have a financial track record or credit history lenders do not have a way of assessing whether you are a high risk customer or not. Most lenders offer loans for young people aged 18 or over although some do not offer loans for people under 21. You cannot apply for a loan or credit if you are under 18.

How do loans for 18 year olds work?

Like other types of loan, you take out a loan for a set amount of money and repay it over a set amount of time. You pay interest on the amount you have borrowed and at the end of the term you should have paid off all the interest and capital.

Loans for 18 year olds with no credit history are more tricky because you will not have a personal credit record. Your credit history is a record of your borrowing. It includes credit cards, personal loans, and other forms of credit such as mobile phone or broadband contracts. It is a complete picture of your financial credit record, although your student loan does not show up in your credit history. For more information on your Credit rating and how it affects your finances you can read more in our Uswitch guide.

Why do young people need a personal loan?

For many students, the maintenance loan they receive from the government during their studies is not enough to live on, especially in London and other major cities. If your parents do not make up the shortfall, you may need to get a job or take out a loan to cover your costs while you are at college or university.

Whether you need extra financing for your studies or need to fund a trip abroad, getting a loan when you're younger can be difficult, but it's not impossible.

Getting a loan when you are younger

Just like trying to get a loan when you're, say, over 60, getting one when you're under 25 can be difficult too. There are prime ages for borrowing, based on various risk factors associated with age. Broadly speaking, the older you are, the less time you might have left to fully pay back the debt before you die. The younger you are, the less experience you have in paying debts or having a regular income.

Many young people will have a very poor credit score purely because they have never taken out any kind of loan before.

Getting a loan when you're younger might be harder, but there are ways to improve your chances of being approved by lenders. The main thing is to look for ways to minimise the appearance of risk.

  • Read more about how credit scores affect your borrowing.

What is the minimum age to get a loan?

Nearly all lenders restrict applications to people over the age of 18, and some will only accept applicants who are over 21.

However, even if you are 18, it is likely that your loan will be your first experience of debt (student loans only start getting repaid while you're working, so they wouldn't count towards your credit history yet). This would restrict your choices and make it harder to get approved.

If you're working and aged 18, then you may not have been working for long, which would add to your perceived risk level. Lenders prefer people who have been in their job for at least a year, as it gives the impression of stability and someone who can be relied upon to pay the bills every month.

Being over the age limit to get a credit card does not mean that it's easy if you're somewhere between 18 and 25 years old. Age becomes less of a factor in applications as you get older, until you get 'too old' around over 60.

What should I know before I borrow money?

It is important to think about whether you really need a loan before you take one out, as you have to be sure you can afford the interest repayments. An alternative is to use a credit card for short-term borrowing, and shop around to reduce the costs of everyday items in order to reduce your spending.

If you still need to borrow, ask yourself the following questions before you apply for a loan:

  • How much do I need to borrow?

  • Are there other ways I can generate money without having to borrow?

  • How long will it take me to repay the loan?

  • Can I afford the repayments?

  • What happens if I can't afford to repay the loan?

  • Is there a cheaper way to borrow money?

What are the borrowing options for young people?

There are a number of different ways to borrow for young people, depending on your credit rating, how old you are and whether you are still in full time education.

Student and career development loans

If you need a loan to help further your career by studying, then there are many options on the market. Many lenders have loans tailored to people who have finished their main studies and are looking to pay for further education.

These are usually called student and career development loans. They usually allow you to pay for your studies and repay the debt after you have graduated.

The interest rates are generally higher than the leading unsecured loan rates, but they often have more flexible terms, designed to help young people find a better way of paying it back.

Your application might also require you to prove how you plan to pay back the loan, and how the loan will help improve your financial situation via your career's development.

Guarantor loans

Guarantor loans are designed for people with poor credit scores, and young people are often included in that category. They allow a friend or family member to guarantee the loan you apply for.

If you fail to keep up with repayments, your guarantor (the friend or family member) will be held responsible. They will need to have a good credit score and be deemed reliable enough to pay back the loan should you fail to do so.

Many young people ask their parents to be guarantors to help get approval. However, guarantor loans often have very high rates of interest, so do your research.

Business loans for young people and young entrepreneurs

Setting up your own business when you are young can be exciting and rewarding, but getting finance for a business start-up when you are under 25 can be problematic. Banks are unlikely to lend to you because you do not have a track record in business.

Young entrepreneurs tend to fund their new businesses through borrowing money from family and friends, using credit cards and personal loans, or tapping into their savings. If you have a great business idea, you may qualify for a grant to help you with start-up costs.

One option to help you with your business idea and offer you personal loans or even start-up finance is the Prince's Trust. So far, it has helped over 86,000 young people to start their own business. The Prince's Trust works with 18 to 30-year-olds living in the UK. You can apply for personal loans for business purposes and there is additional start-up finance support if you need it. You can find out more here.

If you business has been trading for less than two years, there is the opportunity to apply for a government-backed Start Up Loan of £500 to £25,000. This loan is designed to help you start or grow your business.

There are a number of advantages to this loan. Unlike a business loan, this is an unsecured personal loan which means that your borrowing is not secured against an asset, such as your home. Also, you will get free support and guidance to help write your business plan.

The loan is open to anyone who lives in the UK, is over 18 and is planning to start a new business or had been trading for fewer than 24 months. You will pay interest (which is currently 6%) but there are no early repayment or arrangement fees and you can pay the money back over a period of one to five years.

You can find out more about the Government start up loan here.

Can young people get car finance?

Car finance is offered in dealerships and showrooms if you are buy a new or used car. It is often offered as an interest-free loan - in other words a 0% interest loan. However, there may be administration and set-up fees which means it is not cost free.

If you are a young person under 21you are less likely to be offered a car loan. If you try to get a car loan elsewhere you will also find it difficult unless you have a credit history and are employed with a regular income. It may be that you have to buy a car with your savings, or wait until you are aged 21 and have a job. While you are saving up you could improve your credit rating so that you have better deals on credit in the future. There are lots of great tips in the Uswitch guide to improving your credit rating.

What is your credit score? How does it affect you getting a loan?

If you are a young person and have never had a credit card, and likely have never paid any household utility bills in your name, then there's a good chance that you have a very poor credit score.

Credit scores are based on your history of financial interactions. If you have paid back debts, including household utility bills, and have not missed payments, then you should have a good credit score.

Young people are also less likely to have a fixed residence. If you are regularly moving between student housing and your parents' then this could be another barrier to improving your credit score. Lenders want to see a fixed address that has the tenant registered on the electoral roll.

By registering to vote you confirm that the address you live in and put on the application is your permanent home.

Loan providers check your credit score to determine how much of a risk it might be to lend to you. The higher your score, the better your chances are of being approved, but for many young people a lower score is almost inevitable.

You should check your credit report to see what is holding back your score and what you can do to improve it. Find out more in our Uswitch report here.

Building up a credit score if you’re young

Firstly, you can start by registering on the electoral roll at your address where you plan to apply for a loan. Secondly, if your landlord includes your bills in the rent, ask if they can put your name down on some of the bills.

Household utility bill payments on a contract appear on credit reports. You could be paying those bills all the time but it might be your landlord's name on the bills, so it would make no difference to your credit score.

You can also build up your credit score by paying back any other debts, including a mobile phone contract or a credit card.

Alternatives to loans for young people

Credit cards are a flexible way of borrowing, but obviously you would not be able to get the amount of money you could get from a loan.

Many banks offer credit cards specifically for students, usually with a higher rate of interest, but they will be more understanding of a young person's circumstances.

There are also credit cards designed for people with bad credit. They are also known as credit builder credit cards, primarily because many young people take them out to help improve their credit score. Compare deals here on bad credit credit cards.

You can also speak to your bank about extending your overdraft and giving you more favourable conditions. Overdrafts can be expensive and restrictive, but if you have an agreed fee-free overdraft this can be a no-cost way of borrowing money for a short period of time.

Some banks offer student overdrafts while you're studying, and you would only pay interest once you graduate. The interest can be expensive once the interest free period is over, so make sure you have plans in place to pay it back before the 0% interest deal ends. Find out how the choose the best student bank account for your needs with our Uswitch guide.

Bad credit loans

Bad credit? Been refused credit in the past? You can still find a loan without resorting to payday lenders