What is a Child Benefit or Family Loan? How Does It Work?
If you've come across something called a Child Benefit Loan or Family Loan, you might be wondering what makes it different from an ordinary personal loan.
Credit unions mainly offer them and are usually for relatively small amounts, often starting at around £500. Rather than making repayments from your wages or by Direct Debit, Child Benefit, or sometimes another regular benefit, is paid into your credit union account and part of it is used to make the loan repayment.
It's a fairly simple idea, but it's not something you're likely to see offered by a high street bank.
How does a Child Benefit Loan work?
Let's say you receive £100 in Child Benefit and your agreed loan repayment is £30.
The £100 is paid into your credit union account. The £30 loan repayment is taken and the remaining £70 is still your money. Depending on the credit union, it can usually be sent straight back to your normal bank account, often on the same day, or you can choose to leave some or all of it in savings.
Some credit unions actively encourage people to save a small amount alongside their loan repayments.
So, for example, your £100 could be split three ways:
£30 towards your loan
£10 into your savings
£60 returned to your normal bank account
The actual amounts and arrangements vary between credit unions, but that's essentially how a Family Loan works.
Is it always Child Benefit?
No. That's one reason you'll see different names for what are broadly similar loans.
Child Benefit Loan is probably the most obvious description, but they are also commonly called Family Loans. Some credit unions will accept other regular benefit payments as well.
Universal Credit isn't normally used in quite the same way, although every credit union has its own rules about which payments it will accept.
Universal Credit isn't normally used in quite the same way, although every credit union has its own rules about which payments it will accept.
If you're looking at a particular Family Loan, check which benefits can be used rather than assuming that receiving a benefit automatically makes you eligible.
Why would someone choose a Family Loan?
Sometimes it's simply because they only need a relatively small amount of money.
You might need £500 to replace a washing machine, repair the car, buy school uniforms or deal with another expense you weren't expecting. You don't necessarily want to borrow several thousand pounds just because that's the type of personal loan your bank offers.
Small loans can also be surprisingly difficult to get from mainstream banks. Credit unions tend to operate differently and many are prepared to offer smaller amounts.
For someone who doesn't have £500 sitting in savings, spreading an essential cost over a manageable period can make sense.
The way repayments are made can also help. Because the repayment is taken when the benefit arrives, there's no separate payment to remember and less chance of accidentally spending the money that was needed for the loan.
What if you've got bad credit?
Having a poor credit history doesn't necessarily mean you can't get a Child Benefit or Family Loan.
Credit unions often lend to a wider range of people than mainstream banks, including people who have had credit problems in the past.
That doesn't mean these are guaranteed loans for people on benefits. They aren't.
A responsible lender will still want to understand whether you can afford the repayments. Depending on the credit union, it may look at your income, regular spending, existing debts and previous borrowing.
Being able to make the repayment matters more than simply receiving Child Benefit.
What if you've got bad credit?
Having a poor credit history doesn't necessarily mean you can't get a Child Benefit or Family Loan.
Credit unions often lend to a wider range of people than mainstream banks, including people who have had credit problems in the past.
That doesn't mean these are guaranteed loans for people on benefits. They aren't.
A responsible lender will still want to understand whether you can afford the repayments. Depending on the credit union, it may look at your income, regular spending, existing debts and previous borrowing.
Being able to make the repayment matters more than simply receiving Child Benefit.
Can a Family Loan help your credit score?
It can help build your credit history if the credit union reports your loan and repayments to the credit reference agencies.
Someone who has never borrowed much may have very little information on their credit file. Someone else may have had financial problems several years ago and now wants to establish a better repayment record.
Making agreed loan repayments on time can add positive information to that history.
It isn't an instant way of getting a good credit score, though. You shouldn't take out an unnecessary loan just to try to improve your score, and missed payments could have the opposite effect.
If this is important to you, ask the credit union whether it reports loan repayments to credit reference agencies.
Why save while you're borrowing?
This is one of the more interesting features of some credit union Family Loans.
Normally, when you make the final payment on a loan, that's it. You've cleared the debt but haven't necessarily got anything put aside.
Some credit unions encourage you to save a small amount alongside each repayment.
It doesn't need to be much. Saving £5 or £10 at a time can gradually build a small emergency fund.
That matters because the next unexpected expense might then be paid partly or entirely from your own savings rather than requiring another loan.
If you finish paying off a £500 loan and have also managed to build £100 or £200 in savings, you're in a different position from when you started.
When can a Family Loan be useful?
There's a big difference between an unexpected expense and an ongoing shortage of money.
If your washing machine breaks tomorrow and you don't have enough savings to replace it, telling you to save for the next six months isn't particularly helpful. You need a washing machine now.
That's the sort of situation where a relatively small, affordable loan can have a useful purpose.
The same could apply to an essential car repair, children's school costs, furniture or another expense that can't easily be postponed.
A Family Loan may also be worth considering if the alternative is much more expensive borrowing.
But the fact that a loan is available doesn't necessarily mean taking it is the right decision.
When might borrowing be a bad idea?
If you're regularly borrowing to pay for food, energy, rent or other normal household expenses, another loan probably isn't solving the real problem.
It gives you some extra money today, but it also gives you another repayment tomorrow.
You also need to think about the amount of Child Benefit you'll have left after the repayment has been taken.
If you normally rely on the whole payment for household spending, committing part of it to a loan could make the rest of the month more difficult.
That's why affordability matters even when the repayment is being made automatically from a benefit.
Could you save instead?
If the expense isn't urgent, this is worth considering.
Suppose you're thinking about borrowing £500 and believe you could comfortably afford to repay £50 a month.
Could you save £50 a month instead? After ten months you'd have £500 of your own money and wouldn't have paid any interest.
What should you check before taking a Child Benefit Loan?
Don't judge a loan purely by whether the weekly or monthly repayment looks affordable.
Find out:
how much you're actually borrowing
the APR or interest rate
how much each repayment will be
how often repayments are taken
how long you'll be repaying the loan
the total amount you'll repay
which benefit needs to be paid into the credit union
what happens to the rest of your benefit
whether you can save alongside the loan
whether the loan is reported to credit reference agencies
A £10 or £20 repayment can sound small. What matters is how many of those payments you're going to make and what the loan will cost you altogether.
So, is a Child Benefit or Family Loan a good idea?
For the right reason, it can be. A Family Loan can provide access to a relatively small amount of money when a conventional bank loan isn't suitable or available. Repaying it directly from a regular benefit can make the payments easier to manage, and some credit unions give borrowers the opportunity to build savings at the same time.
It can also help establish a positive credit history where repayments are reported to credit reference agencies.
But it's still borrowing. For an essential £500 expense that you can't reasonably postpone, an affordable Family Loan may be useful. If you're borrowing because you run short of money every month, adding another repayment may make things harder.
Perhaps the best question isn't “Can I get a Family Loan?”
It's “Do I need to borrow this money now, and can I comfortably afford to pay it back?”