For those with a poor credit history, finding a loan to help meet their expenses or consolidate their debt can be a major challenge. With lenders more likely than ever to refuse borrowers on the basis of bad credit, guarantor loans are becoming an effective solution for many borrowers.
What Is A Guarantor Loan?
A Guarantor loan is effectively the same as a normal unsecured personal loan, except that the lender has the added security of a second person signing to the loan agreement. If you take on a guarantor loan and fail to meet the loan repayments on time, your guarantor is then required to step forward and make repayments in your place.
Because of the more secure nature of this type of loan, lenders are more likely to offer those with bad credit this option rather than a standard personal loan. The terms can vary depending on the lender, but the borrower should have a fair amount of flexibility over how much they would like to borrow and how long they’d like to repay the loan over. Generally speaking, guarantor loans tend to range from a one year to five year term, so repayments can be spread out over a fairly long period if you are not able to repay the loan quickly.
What Are The Advantages?
The primary advantage to a guarantor loan is that it doesn’t require a perfect credit score on the behalf of the borrower. Many people with poor credit who are trying to deal with their debt turn to payday loan companies as a last ditch attempt to fix their financial woes. Payday loans are short term, high interest loans that come with hefty interest rates, but because of the ease of the application process and the fact that the lenders rarely carry out stringent credit checks, they often seem to be the only solution for those with a difficult financial history.
Guarantor loans can offer a far more cost-effective and risk-free alternative to payday loans, and allow the borrower to spread repayments out over a longer period, rather than facing the pressure of repaying the loan in full on their next payday.
Additionally, taking out a guarantor loan that you are absolutely positive you can pay back in full and on time can be a great way to rebuild a poor credit score. If you meet each repayment on time and repay the loan in full by the end of the term (or early, if possible), you will come out the other side with a stronger credit rating and a more solid financial foundation to build on.
Who Can Be A Guarantor?
The most important step when seeking out a guarantor loan is to find a trusted guarantor. The guarantor must be somebody who you trust, and who trusts you, so they are likely to be a close friend or family member. They must be completely willing to take over repayments if you cannot meet them, and have the financial means to cover this obligation.
A guarantor normally needs to be over the age of 21. The lender will ask for details about the guarantor’s finances and will run a credit check, so the guarantor will need to have a good credit history and solid proof that they will be able to make repayments if you cannot do so.
What Are The Downsides?
The primary disadvantage of a guarantor loan is the relationship required between the borrower and the guarantor. Because of the risk involved in taking on a guarantor loan, a great deal of trust needs to be involved, so you are essentially putting your relationship with this person on the line.
Guarantor loans can also have hidden fees and charges, so make sure that you read all of the fine print carefully if you do agree to take on this type of loan. Late repayments can often lead to larger charges than you might expect, so try to stay on top of the loan as best you can.
What Can A Guarantor Loan Be Used For?
A guarantor loan can usually be used for whatever you need it for- whether that’s buying a new vehicle, making improvements on your home or covering emergency expenses. There aren’t usually conditions attached to guarantor loans that specify what the loan must be used for.
However, taking on debt can be a significant financial burden, so if you already have a poor credit history then it’s not recommended that you add a guarantor loan to your debts unless absolutely necessary.
Many people find that the most useful way to use a guarantor loan is to help solve their debt problem, rather than making it worse. Guarantor loans can be used as a debt consolidation loan, where the borrower uses the loan to pay off all of their existing debts, consolidating the amount owed into one monthly repayment. This can be especially helpful if your outstanding debts are high interest payday loan or credit card repayments, and will allow you to re-organise your finances into a more manageable, lower interest monthly repayment.