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Loans for young people

Borrowing options if you've limited credit history

Rosie Hamilton
Rosie Hamilton | Edited by Luke Warren
Updated 27 November 2023

Whether you're buying your first car or replacing an on-the-blink laptop, a loan may seem like a good way to borrow the funds needed. But accessing one can be difficult for many younger people, plus it's a big commitment. In this guide we talk you through the main types of loans that may be available, their pros and cons, plus alternatives to consider.

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In this guide

How old do I have to be to get a loan?

Most lenders will offer a loan to you if you're aged 18 or over, and have a decent credit score and reliable income. But some of the best deals will only be available to those aged over 21 (or even 25).

However, just because you're old enough to get a loan, doesn't mean you SHOULD get one. A loan is a large, long-term credit commitment, and not something to just jump into. We talk you through the pros, cons and points to consider below.

You will likely qualify for some loans if you...

  • are over 18
  • have a decent income and are in full-time employment
  • have a mobile phone contract, credit card or other financial product

When you apply, you'll also need ID, a bank account and some proof of income, such as a bank statement, payslip or employment contract.

Importantly, don't just apply for a loan without first checking whether you'll qualify. Applying willy-nilly can damage your credit score, which can make any future borrowing more difficult. To avoid this, you can check whether you'll qualify for many loans BEFORE you apply, with our Loans Eligibility Calculator.

What types of loans are available for younger people?

Your options for getting a loan as a young person may be limited, but it is still possible to borrow money if you're over 18 and have a reasonable credit score. Again, this should only be done after careful consideration.

The most common types of loans available to young people are:

  • Unsecured personal loans: A loan that you pay back in monthly instalments over a set period of time.

    The rate of interest you pay is fixed, so you pay back the same amount every month. And, because they're 'unsecured', you don't have to put up a valuable asset, such as your home or car, as a guarantee that you'll repay.

  • Guarantor loans: Like a personal loan, except a family member or close friend agrees to cover your repayments if you can't.

    But be warned: we'd caution against these types of loans where possible. They usually come with very high interest rates, and there have been a lot of issues with guarantor loan providers in the past – including them not doing proper checks to ensure repayments are affordable.

While most lenders will have loans on offer for young people aged 18 or over, the products with the lowest interest rates will only be available if you have a good credit score, or you're older than 21.

Important. Many young people will also have a student loan, but these don't really work in the same way as other loans – see our full Student loans guide for a detailed explanation. 

What are the pros and cons of taking out a loan as a young person?

While a loan can be useful in some circumstances, they're a large and long-term commitment, and certainly not for everyone. It will also be harder for you to take out a cheap loan if you're a young person. 

Before you decide either way, consider the following pros and cons, and see below for more points to consider.

Pros

  • Financial flexibility: A loan can be a good way of spreading the cost of a large purchase, such as replacing a broken laptop, or buying a new car.

  • Building a credit score: Making regular, on-time repayments on a loan helps to improve your credit score, and makes you more attractive to lenders.

    This will make it easier to take out larger loans (with cheaper rates), credit cards and even mortgages in the future.  

Cons

  • High interest rates: If you have a limited credit history, you'll usually not qualify for the loans with the best rates (or 'APRs'). This can make personal loans very expensive.

  • Smaller-sized loans: As a younger borrower, you may only qualify for a smaller loan. Lenders will want to make sure you're able to pay it back before letting you borrow more. This can mean you may not be able to borrow enough for very large purchases.

  • Long-term financial commitment: Taking out a loan means committing to making repayments every month for a number of years (often between three and five, but sometimes up to 10). So be realistic about how your finances might look over the next few years before committing.

  • Missing repayments: Danger! If you find you're not able to keep up with your monthly repayments, you'll not only risk damaging your credit score, but may also face hefty penalty fees, and falling into more debt. 

  • Things to consider before taking out a loan

    Alongside the general pros and cons, here are some key rules to taking out a loan:

    • Budget how much you can afford to repay
    • Only borrow as much as you NEED to
    • Pay the loan back as quickly as you can
    • Consider whether a loan is the cheapest way of borrowing

    For a large, one-off purchase, a loan might be the best option, but if you're looking to make a smaller purchase or build up your credit score, an alternative such as a 0% overdraft or credit card might be a cheaper and more convenient way to borrow. 

    If you're on the fence, we go into more detail on these alternatives below, and cover everything you need to know before taking out a loan in our Personal loans guide.

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

The main reason that many young people find it difficult to take out a loan is because they have a limited credit history. 

Your credit history gives banks and lenders an insight into how you've dealt with bills and debts in the past. But if it's your first time trying to borrow money, you'll likely have very little on your credit file. This makes it difficult for lenders to know how risky it is to lend you money. 

Because of this, lenders will be more cautious. They will offer to lend you less money (and usually with a higher interest rate) until you've shown that you're a reliable borrower.

Other things that make it harder for young people to get a loan include:

  • Employment status: Having a full-time permanent job makes you more appealing to lenders, because they can be more confident that you'll be able to make repayments each month. 

  • Bad credit: If you've struggled with debts in the past (for example you've found it hard to repay a credit card or overdraft at uni), it can be harder for you to get a loan. There are specialist loan products available, but you may need to invest some time into rebuilding your credit score before you'll qualify.

    And if you're still struggling with debts, we take you through how to manage, step-by-step, in our Debt help guide. 

Before you apply, it's worth taking a look at your credit file for free, and if you're serious about getting a loan, always check what you might be eligible for using our free Loans Eligibility Calculator. 

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

    Your credit history is held by the three credit reference agencies: Experian, Equifax and TransUnion. Each one will use this information to come up with a 'credit score', which you can use to get a sense of how lenders view you. However, lenders and financial institutions won't see this score – it's just for you. 

    Lenders will see the information included in your credit report: your 'credit history'. They'll use your credit history to decide whether they think you're reliable financially or not. If you don't have a credit history (or it's very limited) credit providers have no idea whether you're any good at paying money back on time, so they'll be more hesitant to lend to you. 

    If you're a student it's likely that your credit history will be quite limited, unless you've got a credit card or taken out a payment plan (for a car or piece of tech, for example). 

    Luckily, having a limited credit score doesn't mean you can't get a loan, but it will reduce the number of products available to you. You can check how your credit history looks for free online, or read tips on how to boost your credit score. 

Alternatives to loans for young people

Loans aren't for everyone, and for many young people there are cheaper and easier ways to borrow money.  

If you don't qualify for a loan, or decide a loan isn't right for you, consider whether one of the following would be a better option:

  • A 0% overdraft on a student or graduate current account: Many student and graduate bank accounts come with generous interest-free overdrafts, which make them a cheaper way of borrowing money than a personal loan.

    Banks compete for your business too, so some will throw in extras such as railcards or free cash. See our Student bank accounts and Graduate accounts guides for our top-pick accounts.

  • Credit builder credit card: These credit cards are for those with limited credit histories. The maximum amount you can spend on them is usually lower than other credit cards, and they'll come with a high interest rate. But pay it off in full each month and a credit builder card can be an effective way of managing your money, while helping to improve your credit score. 
  • Car finance: According to MoneySuperMarket, 52% of young people looking for a loan are looking for a way to buy a car. If you need a new car but don't have the cash to buy it outright, there are a range of car finance options out there, including hire purchase and personal contract purchase. We break down the basics over in Car finance.

  • Buy now, pay later (BNPL): Managed correctly, buy now, pay later can be a cheap and quick way of accessing credit. But BNPL should be used carefully: if you miss a payment you face late fees and, increasingly, marks on your credit file. Read our Buy now, pay later guide for a full breakdown of how it works.

For tips on how to stretch your student loan, head here next:
 

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