If you’re unemployed or receiving benefits, there’s a good chance that you won’t meet the criteria for traditional lenders such as banks or credit card companies. But that doesn’t mean affordable borrowing is out of reach.
It’s these kinds of situations where joining a credit union like London Mutual can be a great option. As not-for-profit providers, we aim to look at things differently, and are geared up to serve the whole community, regardless of your current employment status.
Why most lenders say no if you’re unemployed
By law, all lenders in the UK are required to carry out affordability checks to make sure that borrowers can reasonably afford to repay the money they lend them. On top of this, most institutions will have rules around creditworthiness – that is, managing the risk that someone won’t repay the money lent to them.
For larger lenders, this can mean rigid rules around employment status and minimum income thresholds that benefit payments don’t meet. Their automated systems often reject applications from people on benefits before anyone reviews them manually.
This pushes people toward expensive alternatives: payday lenders, doorstep loans, or worse. But there are legitimate, affordable options if you know where to look.
How credit union loans are different
Credit unions are not-for-profit co-operatives that serve members rather than shareholders. Because our focus is on serving people, not making a profit, credit unions like ours go the extra mile to make sure we can serve people excluded from mainstream banking.
“Traditional lenders use automated systems that reject anyone on benefits automatically,” says Ben West, Head of Business Development. “We look at the full picture. What are your essential expenses? What’s left over? Someone managing £1,200 a month in benefits responsibly often shows better financial discipline than someone earning £3,000 and overspending.”
Lisa Mansfield, one of our Member Service Officers, puts it simply: “Benefits are income. Regular, reliable income. We’re asking if you can afford the repayments, not whether you have a job.”
What Credit Unions Offer
Lower rates
By law, credit unions can charge a maximum of 42.6% APR, which works out at 3% per month. This can be significantly lower than alternatives like doorstep lenders or payday loans. This can mean the difference between paying £18 or £150 in interest on the same loan.
Flexible repayment terms
When offering you a loan, we’ll suggest a loan length – up to 24 months – which is based on how much you can afford to repay each month. Unlike payday loans that demand quick repayment (potentially pushing you into taking out another loan to cover it) we structure loans around what’s affordable and realistic for your situation. Shorter terms mean less interest; longer terms mean lower monthly payments.
Saving as you repay
A loan should be about helping you to move forward, not trapping you in a cycle of debt. All our loans are ‘save as you repay’ loans. This means that depending on what you can afford, we’ll encourage you to put aside a little extra on top of your loan repayments – from as little £5 to as much as £50 each month – which will go straight into your savings. This means that you’ll build a handy nest-egg at the same time as you repay your loan, making you less reliant on borrowing in future.
The secret ingredient – benefits deductions
If you’re receiving benefits, then one of the conditions of a credit union loan will be agreeing to have your repayments deducted directly from your benefit payments from the Department for Work and Pensions (DWP) or HMRC.
As a condition of your loan, we may ask you to set up a free credit union account and to contact the DWP or HMRC to have your benefits paid into this account. Each month, we’ll take the loan repayment directly from these benefits, leaving the rest for you to use as normal. The deduction happens reliably every payment cycle—you never have to remember a payment date or worry about having enough left over to make your repayment.
For you, this means one less thing to manage on a tight budget. No missed payments, no late fees, no stress about timing. For the credit union, it dramatically reduces the risk of missed payments, which is precisely why we can offer affordable loans to people on benefits when other lenders won’t.
It’s a simple arrangement that works for everyone. The key difference from government Budgeting Loans is that credit unions can lend larger amounts, for more purposes, and the arrangement gives us the confidence to approve loans that might otherwise be too risky.
Other options if you’re unemployed
Borrowing options that may cost more
- Guarantor loans require someone with good credit to guarantee your loan, which puts them at financial risk if you can’t repay. Rates can be high, and there’s no save-as-you-repay element.
- Doorstep lenders offer the convenience of weekly collections at your home, but interest rates often exceed 400% APR. The ease of access rarely justifies the cost.
- Bad credit cards from some companies come with interest rates around 30-40% APR and low credit limits. These can work if you’re disciplined enough to pay the full balance each month, but they’re a risky choice on a tight budget.
Options to avoid
- Even these days, payday lenders can charge hundreds, or even thousands of percentage APR. While FCA rules have improved things somewhat, there is still a high chance of ending up in a cycle of debt, needing to borrow to pay back existing borrowing. This makes them extremely dangerous when you’re on a limited income.
- Rent-to-own stores base their appeal on letting you take goods (such as a washing machine or freezer) home immediately but you’ll end up paying two or three times the retail price. Almost any other borrowing option works out cheaper.
- Never borrow from illegal loan sharks. They charge extortionate rates and use intimidation to collect payments. If you’re being pressured by an unlicensed lender, contact the Illegal Money Lending Team—you’re not in any trouble, and they can help you get out of a difficult situation.
Comparing the cost of different borrowing options
The difference in borrowing costs can be substantial. Here’s what borrowing £300 over 6 months actually costs from different sources
Credit union (26.8% APR)
- Monthly repayment: £53
- Total repayment: £318
- Total interest: £18
Guarantor loan (49.9% APR)
- Monthly repayment: £55
- Total repayment: £330
- Total interest: £30
Doorstep lender (400% APR)
- Monthly repayment: £70
- Total repayment: £420
- Total interest: £120
Payday loan (extended)
- Monthly repayment: £75+
- Total repayment: £450+
- Total interest: £150+
Other places to find advice and support
Only borrow for essential needs you can’t cover from your income. If you’re struggling with debt or money management, seek free advice from Citizens Advice or StepChange before taking on new credit.
Citizens Advice 0800 144 8848
StepChange Debt Charity 0800 138 1111
National Debtline 0808 808 4000
Turn2us Benefits calculator and grants search
Money Helper moneyhelper.org.uk or 0800 138 7777
Key takeaways
Being unemployed or on benefits limits your borrowing options, but doesn’t eliminate them. Credit unions offer affordable rates, flexible repayments, and supportive approaches designed for people in your situation.
Before considering expensive alternatives, check whether you can join a credit union. It could save you hundreds of pounds.
