Loans for young people

You might need to borrow money at some point before the age of 25, perhaps to buy a car, or to cover the cost of emergency repairs. But for many young people, being approved for a loan can be difficult, because financial providers are cautious about lending to someone with little or no credit history. We look at your options.

You might need to borrow money at some point before the age of 25, perhaps to buy a car, or to cover the cost of emergency repairs. But for many young people, being approved for a loan can be difficult, because financial providers are cautious about lending to someone with little or no credit history. We look at your options.

Alex Hasty
Insurance and finance expert
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Posted 15 DECEMBER 2021

What is the minimum age that you can get a loan?

Nearly all UK lenders offer personal loans for those aged 18, but some loans are only available to people aged 21 or older. You can’t apply for a loan or other form of credit in the UK if you’re under 18. If you’re looking for loans for 17-year-olds or loans for 16-year-olds, your best bet might be to persuade the bank of mum and dad to lend you some money. If you’re lucky, they might even waive the interest charges!

A personal loan may well be your first experience of debt, so you won’t have had a chance to build up a credit history. This is a record of your financial history, including how you’ve repaid debts. Credit reference agencies give you a credit score, which is based on your credit history. Lenders use this to help them decide whether to give you a loan, as it shows how responsible you’ve been with debt in the past.

Your student loan is an exception – it doesn’t appear on your credit report, so it won’t impact your credit score, but it also won’t help you build a credit history.

What type of loans can young people get?

Aside from student loans, which are specifically for tuition fees and living costs, young people can get other types of loan. These include:

Personal loan – most financial providers offer personal loans up to £25,000, and you can usually spread repayments over a period of up to 10 years. But if you have a ‘thin’ or poor credit history, the amount you can borrow may be limited – and with higher interest rates.

Guarantor loan – a family member or close friend agrees to cover the repayments if you can’t. Your guarantor will need to have a good credit score, and interest rates are usually higher than standard loans. Unfortunately, you can’t compare guarantor loans with Compare the Market.

Car finance – this can either be a personal loan used to buy a car, or the car finance you’ll see offered by dealerships to borrow money specifically for a vehicle.

With all these types of loan, you’ll pay back the amount you’ve borrowed, plus interest, in monthly instalments. Make sure you draw up a budget so you can comfortably afford to pay back what you owe each month. If you don’t stick to your repayment plan, you’ll face charges, and this may affect your chances of getting credit in the future.

Find out more about how loans work

You’ll also see payday loans advertised. Be aware that these are high-cost loans aimed at short-term borrowing. MoneyHelper, formerly known as The Money Advice Service, warns that late repayment of these loans can cause serious problems, so check out lower-cost alternatives first.

What do I need to consider before applying for a loan as a young person?

If you’re thinking about taking out a loan, there’s a few questions you need to ask yourself, including:

  • How much do I actually need?
  • Do I really need the cash?
  • How long will I need this money for and how long will it take me to pay it back?
  • Can I afford the repayments?
  • Is this the cheapest way of borrowing the money I need?

Taking out a loan, however small, should never be a decision made in haste. If you were to miss any repayments, you’d likely be hit with additional interest and late fees, making it even harder to repay the balance owed. Missed payments will also harm your credit score, which could affect your future chances of getting credit. And if you can’t repay your loan, you risk being taken to court.

Compare the Market Limited acts as a credit broker, not a lender. To apply for a loan you must be a UK resident aged 18 or over. Credit is subject to status and eligibility.

Should I speak to my lender before making an overpayment?

Yes. If you want to make a partial overpayment, then a 28-day notice period applies. You’ll be charged interest on the full amount you owe for 28 days after you notify your lender of an extra payment.

If you want to pay your loan off in full, you’ll need to ask your lender for an ‘early settlement amount’, which is a recalculation of what you owe based on:

  • what you’ve already paid and the amount you still owe
  • what interest charges apply
  • whether there are any early payment fees

Your lender’s obliged to give you this figure if you ask for it and to give you at least 28 days to think it over. If you decide to go ahead, you’ll need to pay the outstanding early settlement amount by the settlement date the lender has given you – otherwise it will need to be recalculated.

If you don’t ask the lender for the figure, you may end up paying the wrong amount.

You don’t have to pay off the loan if you decide you’d be better off continuing with your monthly instalments.

What is a credit score and how can it affect you getting a loan?

Your credit score is basically a rating to show lenders how good you are with spending and borrowing money. If you pay things like utility bills, a mortgage, take out a loan, credit card or even bank overdraft, these are all things which can lower or build your credit score. Having a good credit score will improve your chances of being approved for loans, credit cards and mortgages, while a bad credit score could mean you’re declined, or charged higher interest rates.

It’s a bit of a chicken-and-egg situation. To borrow money, you’ll need a good credit score. But to get a good credit score, you’ll need to borrow. So, what can you do?

Fortunately, a lack of credit history doesn’t mean you can’t get a first-time loan, but it does limit your options. You’ll generally face higher interest payments and, in many cases, the amount you can borrow will also be less than someone with a long-established credit rating. That’s because lenders see you as a greater risk than borrowers with a proven track record of making payments on time. This can seem unfair but, because you have no credit history, lenders can’t predict how you’ll manage credit in the future.

If you want to find out what your credit score is, you can do so through a credit reference agency. The three main UK agencies are Experian, Equifax and TransUnioin. 

How can you build up your credit score if you’re young?

If you’re worried about being accepted for a loan, or wondering ‘what is a good credit score?’ the easiest way to improve your chances is to take steps to build your credit score.

  • Open a bank account if you don’t already have one. You won’t be able to get most types of loan without one.
  • Register to vote, as being on the electoral roll is something lenders will use to check your details are correct.
  • Move bills paid by your parents into your name – your mobile phone contract, for example.
  • Always pay what you owe on time, every time

Every time you apply for a loan it leaves a ‘footprint’ on your credit report. Being refused a loan, especially more than once, will have a negative effect on your credit score. So, when you start looking, it’s a good idea to do what’s called a soft search, which can only be seen by you, not prospective lenders. You can do this using our loan eligibility checker.

You’ll stand a better chance of being approved and getting a lower interest rate if you can hold off borrowing until your credit score has improved.

Compare the Market Limited acts as a credit broker, not a lender. To apply for a loan, you must be a UK resident and aged 18 or over. Credit is subject to status and eligibility.

Read more about how credit scores affect the cost of borrowing.

How much should I borrow as a young person?

How much you should borrow depends on what you need the money for. Young people tend to need a loan for things like buying their first car, home improvements or a wedding.

Once you’ve decided you need a loan, the first thing to do is figure out borrowing the right amount of money. You don’t want to borrow more than you need, as you could end up overstretching yourself and be repaying more in interest. If you’re borrowing money to pay for something like a car, wedding or home improvements/repairs, you should do your research and get a quote for whatever it is you need. From there, you can use a loan calculator to see if you could realistically afford to borrow this amount. If you think it’s affordable, you can then use our loans eligibility checker to find the right loan for you.

Business loans for young adults

Are you a budding entrepreneur who’s keen to start a new business venture, but need a loan to get your idea off the ground?

As a young person, you might find a traditional bank loan hard to come by because lenders may view you as a risky prospect, but luckily you have some other options.

The Prince’s Trust Enterprise Programme offers those aged 18 to 30 help with developing their businesses, with loans of up to £5,000 available. Alternatively, government-backed start-up loans of up to £25,000 are available for businesses that have been trading for less than two years.

Alternatives to loans for young people

If you’re looking to borrow money, a personal loan isn’t your only option. Consider these alternatives too:

Student credit card – if you’re at college or university, you could get a credit card specifically designed for students. It works in much the same way as a regular one, but there’s usually no annual fee and you may be offered perks, such as discounts on rail fares. The credit limit may be small, so you wouldn’t use one of these to buy something big, like a car, for example.

Credit builder card – designed for people with bad or no credit history, credit-building cards can help you build up your credit rating slowly but surely. Bear in mind that the maximum spend limit is usually lower than other credit cards and the interest rate will be high.

Arranged overdraft – an overdraft allows you to borrow money through your current account, so you could see if your provider is willing to increase your limit. Only use your overdraft for the short-term and avoid using it for big spends as it can get very expensive.

When taking on any form of debt, think carefully about whether you really need it. Do you have any spare cash to save up for what you want? Or could you save money by cutting costs, reducing your outgoings and increasing your income? If you’re having problems with debt, seek help. Find out where to get free debt advice on the MoneyHelper website.

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