With so many different loan options available to you it can be quite easy to forget which is which. Regardless of what you need your loan for, choosing the best style of loan for your needs is a big decision and one that needs to take into account a number of different things. The first question you need to answer is what do you need a loan for and is a loan the best option? The second is how much do you require and what length? The final thing to consider is your credit rating and how likely you are to have a loan application approved.
You know you need a loan, you have worked out how much you require but then you hit a stumbling block, you have a poor credit rating. In this situation there are often two styles of loan that stand out – payday loans and guarantor loans. Below we will go through the basics of the guarantor loan and what makes it different, giving you a better understanding on whether this is the best loan option for you.
Guarantor & payday loans – what’s the difference?
As mentioned above, if you have a poor credit rating or have been rejected credit in the past, you may be looking at guarantor and payday loans as your only options. The main difference between the two relate to the amount borrowed and the length of the loans. In the UK the average amount borrowed through a payday loan is approximately £270 over a 34 day or less term. In comparison, guarantor loans have repayment lengths starting at 1 year and going up to 5 years and the amounts are generally between £1,000 and £10,000.
A guarantor loan is aimed at those that may not be able to get a loan via the more traditional lenders, either because of poor credit ratings or rejections in the past. They often allow you to borrow more money than you would otherwise be able to with a bad credit score but they have to be guaranteed by someone else.
What is the guarantor and who can be one?
The guarantor is the person that guarantees the loan. They sign an agreement that they would pay any monies due if you were unable to make repayments or defaulted on the loan. This is what makes a guarantor loan different to others on the market and they are a relative newcomer to the loans industry. Having a guarantor was commonplace in the days prior to a computer determining credit scores and it is still relatively common to be asked for a guarantor when applying for a mortgage or rental agreement on a property.
Almost anyone can be a guarantor as long as they are over the age of 21, have a good credit history and have no financial ties to the borrower (i.e. a spouse). This means that anyone that meets those criteria can be a guarantor – friends, family and even work colleagues. The big thing to take into account when asking someone to be a guarantor for you is that it is a big commitment they are making to you, so it is very important it is someone you know and trust.
How much do guarantor loans cost?
As with all loans the total cost wholly depends on your individual circumstances and the amount you borrow. Typically guarantor loans have their interest rates starting between 39.9% and 49.9% APR, so they are generally more expensive than a traditional personal loan. Always remember that if you fail to keep up with the repayments of the loan your guarantor will be liable for payment to the lender, this then could put a strain on a close friend or family member.
Is a guarantor loan the best option for me?
Guarantor loans can be a good option if you have a poor credit history or have been rejected a loan in the past. Borrowing through this type of loan can help you to rebuild your credit rating and lead you to potentially being accepted by more traditional lenders in the future. To do this though you have to show that you are responsible enough to make repayments on time and manage your debt.
As with all financial decisions, only you are able to determine the best fit for your requirements and your final decision should be one that you are comfortable with. The added pressure of a guarantor loan is having a friend or family member involved in your finances, you should make sure they are comfortable to support you in this manner and that they are aware of their potential obligations. If well managed a guarantor loan can be a good way to build up your credit rating or access credit for an important purchase.
Article provided by Solution Loans; a technology-led finance company that specialises in providing expert advice to customers in search of the most suitable type of credit.