Raising a family is a joy, but let’s be honest, it can also put a strain on your wallet. Unexpected bills, school supplies, or seasonal expenses can stretch you thin. If you’re receiving Child Benefit, you might have heard about Child Benefit Loans or Family Loans as a potential solution. But are they right for you?
This article covers Child Benefit Loans in detail, explaining what they are, how they work, and the important things you need to consider before making a decision. We’ll break down the pros and cons, helping you decide if a loan could be a helpful tool for your family or if there are better alternatives.
Remember, this article is for informational purposes only and doesn’t constitute financial advice. It’s always best to consult with a professional before making any financial decisions.
What is a Child Benefit Loan?
Child Benefit Loan (also known as Family Loan) is a loan provided by a partnership of local credit unions as an alternative to high-cost lenders. You can apply for a first child benefit loan of up to £600, on the condition that your child benefit payments are paid directly to the credit union. Parents who receive child benefits for 2 or more children, might be able to apply for more, depending on the lender.
You can apply for a Child Benefit Loan for any purpose that supports your family. Many families find this loan helpful for expenses such as up-front childcare costs (like nursery deposits) or meeting expenses such as school uniforms or trips.
What are credit unions?
A credit union is a financial co-operative that’s owned and controlled by its members. They provide services to their members including:
- deposit taking
- savings
- lending
Credit unions are dual-regulated, which means they’re regulated both by the Financial Conduct Authority (FCA) and by the Prudential Regulation Authority (PRA).
How do family loans work?
There are some differences between different lenders, but generally, the process goes as follows:
1. Get everything set up: If your loan application is approved, you will get a credit union account set up and arrange for your child benefit to be paid into it. The whole of your Child Benefit will be paid to the lender moving forward.
2. Receive your loan: Once your first child benefit payment arrives in your account, your lender can release your loan funds.
3. Repay and save: Loan repayments will be taken automatically each time your child benefit comes in. The remaining funds are yours to withdraw or save. However, some lenders will require you to save a small amount (typically £2-3 per week).
Count the cost: Understanding the interest rates
While Child Benefit Loans might charge less interest than some high-cost lenders, understanding the interest rates is very important. Child Benefit Loans typically have fixed interest rates, meaning the rate remains constant throughout the loan term. However, these rates can be significantly higher than some other borrowing options, so it’s essential to do the math and count the total cost before committing.
Interest rates typically fall between 35% and 42.6% APR (Annual Percentage Rate) for child benefit loans. This means for every £100 you borrow, you’ll pay an additional £35 to £42.60 in interest every year on top of the repayment amount.
Example: Let’s say you borrow £500 with a 42.6% APR and a 12-month repayment term. Here’s how much you’ll end up paying:
- Monthly repayment: Your monthly repayment would be around £47.22 (excluding any additional fees). This is calculated by dividing the total loan amount (£500) by the number of months (12) and adding the monthly interest amount (around £17.37).
- Total interest paid: Over the 12 months, you’ll pay a total of £208.44 in interest (12 months * £17.37 monthly interest).
- Total cost of the loan: In total, you’ll repay £608.44 (original loan amount of £500 + total interest paid of £208.44).
This is just an example for illustrative purposes. The actual interest rate and repayment terms will vary depending on the lender and your personal circumstances.
Am I eliglible for a Child Benefit Loan?
Not everyone can qualify for a Child Benefit Loan, but here are the general eligibility requirements:
- Be over 18 years old: This is the standard age of majority in most countries.
- Be in receipt of Child Benefit: This is a government benefit paid to parents or guardians for each eligible child. The specific requirements for receiving Child Benefit vary from country to country.
- Have a UK address: This is because Child Benefit Loans are typically offered by credit unions and other lenders in the United Kingdom.
- Not be bankrupt or involved in an Individual Voluntary Arrangement (IVA) or Debt Relief Order (DRO): These insolvency proceedings can prevent you from taking out new loans.
- Meet the lender’s affordability criteria: You must be able to afford to make the monthly repayments on the loan. The lender will run a credit check and assess your income and expenditure to determine if you are eligible.
In addition to these general requirements, some credit unions may have their own specific eligibility criteria. For example, some lenders may require that you have at least one child under a certain age, or that you have been receiving Child Benefit for a certain time.
If you are interested in applying for a Child Benefit Loan, it is important to contact the lender directly to find out their specific eligibility requirements.
Family Loan: Pros & Cons
Pros:
- Affordable alternative: Compared to high-cost lenders, Buy Now Pay Later (BNPL) and payday loans, Child Benefit Loans offer a more affordable option with lower interest rates.
- Spreads out costs: By using your child benefit payments for repayments, you can spread out larger expenses into smaller, more manageable chunks, easing the financial burden.
- Builds savings: Some Child Benefit Loans come with a built-in savings account, allowing you to accumulate a small savings pot alongside your loan repayments.
- Improves credit score: Making consistent repayments on your loan can positively impact your credit history, potentially making it easier to access traditional loans in the future.
- Managed by credit unions: Many Child Benefit Loans are provided by more ethical lenders like credit unions, known for their fairer practices and community focus.
Cons:
- Interest rates: While lower than payday loans, Child Benefit Loan interest rates can still be higher than traditional credit cards or personal loans, especially for larger amounts. Compare rates carefully before committing.
- Impact on child benefit: Using child benefits for loan repayments (including interest) means less money directly available for your children’s needs. Consider their well-being first and foremost.
- Can tempt overspending: Easy access to credit can be tempting, leading to borrowing more than you can comfortably afford.
- Impact on credit score: While timely repayments can improve your credit score, missing payments can significantly damage it. Poor credit rating can impact your ability to access future credit products.
- Limited flexibility: Unlike credit cards with revolving credit limits, Child Benefit Loans are fixed-amount loans with set repayment periods, offering less flexibility in managing unexpected costs.
- Not a magic bullet: These loans address short-term needs, not long-term financial struggles. Addressing the root cause of your financial difficulties is crucial for sustainable improvement.
Should I get a Child Benefit Loan?
Ultimately, the decision of whether to get a Child Benefit Loan depends on your unique circumstances. Weighing the pros and cons is essential, but there are other factors to consider too.
Here are some additional questions to ask yourself:
- What is the reason for needing the loan? Is it for a one-time expense or an ongoing need?
- Have you explored other options, such as budgeting, increasing income or seeking government support?
- How much can you realistically afford to repay each month? Don’t forget to factor in essential expenses like food and housing.
- What is the interest rate and total cost of the loan? Compare it to other loan options and make sure you understand the terms and conditions.
- Do you have a plan for repaying the loan? Make sure you can stick to the repayment schedule and avoid missing payments.
Remember, responsible borrowing is key. Don’t rush into a decision, and prioritise your family’s financial well-being above all else. By carefully considering all options and seeking professional advice if needed, you can make an informed decision that aligns with your specific needs and goals.
How to apply for a Child Benefit Loan
If you have weighed the pros and cons and believe a Child Benefit Loan aligns with your needs, here’s a breakdown of the typical application process:
1. Research and compare:
- Start by researching different lenders. Compare their interest rates, fees, loan amounts, and repayment terms. Remember, eligibility criteria might vary, so check if you meet the requirements before applying.
- Consider alternatives: Explore other options like budgeting or seeking government support before proceeding.
2. Gather required documents:
- Have your personal identification documents like your passport or driver’s license ready.
- Proof of address like utility bills or bank statements will be required.
- Prepare recent bank statements showing proof of income and expenses.
- You’ll need details of your child benefit payments, including the reference number and the account it’s currently paid into.
3. Choose your lender and apply:
- Select the lender that best suits your needs and eligibility. Some lenders offer online applications, while others might require in-person visits.
- Complete the application form accurately, providing all necessary information.
- Expect affordability checks and potential credit score assessments. Be prepared to explain your financial situation and loan purpose.
- If your application involves redirecting your child benefit payments, you’ll need to contact HMRC separately to make the necessary arrangements. Your lender might guide you with this.
4. Approval and loan agreement:
- The lender will review your application and notify you of their decision.
- If approved, you’ll receive a loan agreement outlining the terms and conditions, including interest rates, repayment schedule, and fees.
- Carefully review the agreement and ask any clarifying questions before signing.
5. Receiving the Loan:
- Once you sign the agreement and complete any necessary steps, the loan amount will be deposited into your chosen account.
- Remember, your child benefit payments will directly contribute to the repayments, ensuring you don’t need to manage separate payments.
Helpful tips:
- Be honest and transparent throughout the application process.
- Don’t borrow more than you can comfortably afford to repay.
- Understand the total cost of the loan, including interest and fees.
- Maintain consistent repayments to avoid penalties and maintain a good credit score.
- Seek professional financial advice if unsure about your financial situation or the suitability of a Child Benefit Loan.
Remember, applying for any loan is a significant decision. By following these steps and prioritising responsible borrowing, you can navigate the application process for a Child Benefit Loan with informed confidence.
Conclusion
Child Benefit Loans, a readily available family loan product, might seem like the answer to temporary financial hurdles. They offer easy weekly payments, but it’s important to approach them with caution and informed decision-making.
Although they can be an alternative to some high-cost lenders, they are still loans that need to be paid back with interest. This means your loan payment will be higher than the amount you borrow due to the added interest.
Before committing to any loan, explore all avenues first. Consider budgeting, side hustles or seeking government support. If you do choose a Child Benefit Loan, prioritise responsible borrowing: only borrow what you can truly afford and use a responsible lender.
Ultimately, informed financial decisions are key to building a secure financial future for your family.
