Not until you have a strong repayment capacity will you be able to qualify for a loan, whether you take it out from a well-known bank or a direct lender. An affordability check is indispensable to the lending process, encompassing the assessment of a borrower's repayment capacity. Despite having a good credit score, your chances of approval for a loan are bleak if your budget does not have the wiggle room to make repayments.  

It means getting approved for a loan can be quite challenging when you are on a low income or receiving benefits. Undoubtedly, banks will not accept your application due to their strict approval criteria. The risk of default is too high when your income is low, and therefore, banks will most likely repudiate your application, but direct lenders are more flexible than banks.  

A few online lenders would be able to entertain your application, provided your chances of falling behind on payments are not too high. The following are the circumstances when lenders could sign off on your application despite low income: 

• You have been laid off. 
• You have been suffering from a long-term illness. 
• You are away from work due to childcare responsibilities. 
• You are already on a low-paying job.  

Your affordability matters 

Whether you are on a low income or on benefits, you must be able to repay your debt on time. Only if you prove your repayment capacity will a lender approve your application. Loans for benefits in the UK from a direct lender are small emergency loans. They come for a small amount of money. You cannot borrow more than £1,000; however, most of the lenders will restrict the borrowing amount in order to ensure that you do not struggle to make repayments.  

At the time of submitting your application, you will be required to provide your financial details. It is enjoined that you carefully provide all income and expenditure details because it can make it or break it. Unemployed loans are small loans. They do not require any credit check.  

Most of the lenders will run soft inquiries, which do not reveal much about your repayment history. They are completely dependent on the financial details you provide in the application form. Make sure that you do not hide any vital information, such as how much money you currently owe or how many family members are dependent on you. Providing misleading information might result in borrowing more than you can afford. This will trap you in a debt spiral.  

A lender would want to see whether your budget has some scope to discharge the debt without compromising on essential expenses. If so, they will sign off on your application. Otherwise, they will repudiate your application.  

How to get a loan if you have a low income? 

There is no doubt that you must have a strong repayment capacity to qualify for a loan, including an unemployed loan, but it could be challenging when you have to take out a loan while being on benefits. The following steps could help improve your chances of getting approval: 

• Arrange a guarantor 

By arranging a guarantor, you can improve your chances of being accepted for a loan. A guarantor will be a third person who will enter into a contract with you. The guarantor must have a good credit score. A lender expects you to arrange a guarantor when your credit rating is not perfect.  

Your guarantor is not obligated to discharge the debt until you refuse to repay. When your guarantor also signs the loan agreement, they can be called on to pay off the whole debt when you fail to do so. However, you must bear in mind that calling on the guarantor must be a last resort. Lenders will not contact them unless all means of recovering money from you have been exhausted.  

Do not forget that if you fail to pay off the debt on time, this will affect your relationship with the guarantor. In addition, the credit score of you and your guarantor will also wreak havoc. Before arranging a guarantor, you must clearly ensure that you will not fail to meet your obligation, and your guarantor is already in the loop about the implications of your default on their credit rating and future borrowing capacity. 

• Have a side gig 

While you can borrow up to £1,000, you will not be able to qualify for more than £500 if you are already on a low income or benefits. This is because interest will be added to the loan amount. Many people find it hard to meet obligations on time, and as a result, end up rolling over the loan. This quickly adds up the loan cost, thanks to high interest penalties and late payment charges.  

If you want to obtain money at affordable interest rates, you should try to improve your income sources. Increased income will help you qualify for a larger amount of money. Further, your lender will find you a less risky borrower. When the default risk is low, your lender will charge competitive interest rates. 

A side gig includes any income source, such as babysitting, pet sitting, Uber driving, and walking dogs. Income from supplement sources will strengthen your overall financial condition.  

• Apply with a co-applicant 

You should apply with a co-applicant if you are struggling to get approval for a loan. A co-applicant will be a borrower too. Unlike a guarantor, they will be responsible for the debt in part and in full from the start. Make sure that you both will not struggle to discharge your debt. Otherwise, it will affect the credit rating of both of you, even if one of you settles the full debt when the other fails to meet their obligation.

The bottom line 

Getting a loan with low income or benefits is not impossible as long as you manage to prove your repayment capacity. Try getting a side gig as a supplement to your income, as it increases your chances of borrowing money at affordable interest rates.