Guarantor Loans – The Basics You Need To Know
Loans, there are now so many different types of loan you can take out all with varying interest rates, borrowing lengths and terms and conditions.
A reasonably recent addition into the unsecured personal loan market is guarantor loans.
Having a guarantor for a financial obligation is not something new, in housing it has been common practice for someone to act as a guarantor when someone applies for rental or a mortgage.
This practice was especially common before everyone received an electronic credit score rating from a computer, nowadays everything seems to rely on how good (or bad) your credit rating is.
So, what is a guarantor loan and who are they for?
What is a guarantor loan?
Simply put, a guarantor loan is an unsecured loan taken out with someone else giving the lender a guarantee that they will make the monthly payments if the borrower is unable to.
The guarantor is generally a family member or a close friend, although they can be almost anyone as long as they are not financially linked to the borrower (e.g. a spouse).
Guarantor loans are often seen as an alternative to payday loans – loans that generally are low amounts borrowed for a short term basis.
The main difference between the two are the amounts borrowed and the length of the loan. Guarantor loans commonly lend anywhere between £1,000 and £10,000 on a borrowing term between one and five years.
In comparison the average amount borrowed from a payday lender is approximately £270 and the loan is taken for less than 34 days in length on average.
Who are guarantor loans aimed at?
Guarantor loans are aimed at those that may not be able to secure a loan via traditional means. This could be for a number of reasons including bad credit history or having been rejected by a lender in the past.
Due to the amounts offered to borrowers, guarantor loans also fill the gap where you may need to borrow a greater amount than offered by other means, such as payday loans.
A guarantor loan does not take into account the credit score of the borrower but instead checks that the person guaranteeing the loan does not have any history with regard to non-payment of debts.
Although a check is made on the credit history of the guarantor, no record is made of guaranteeing a loan. What this means is that you are able to rebuild your credit score, provided that you make all the repayments on time, leading you to potentially be able to apply for credit from more traditional lenders in the future.
What are the interest rates?
The interest rates are generally higher than those a traditional lender would offer, however this is due to the nature of the loan and that they are offered to people with no real credit checks carried out.
The interest rates for guarantor loans start anywhere between 39.9% and 49.9% APR but this does depend on the person borrowing and their credit worthiness.
Other things you should know
Taking out a loan is a big commitment and one that should not be taken lightly. A guarantor loan has the added dimension that someone else will be involved in your financials, it is important that you consider the effect this may have on any friendship and that you talk thoroughly with guarantors about their responsibilities before they agree.
The guarantor will be legally obliged to pay the debt if the original borrower cannot pay so it is very important they are someone the borrower trusts and vice-versa.
In a number of circumstances guarantor loans are a good option for borrowing money. The key, as with any financial decision, is that you know your obligations and are confident in making repayments. Do research lenders, discuss your decisions with someone you trust and ultimately go with something you are comfortable with.
Article provided by Solution Loans; a technology-led finance company that specialises in providing expert advice to customers in the search for obtaining the right type of credit.
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