Guide to Guarantor Loans
High street banks were once far more willing to lend to customers despite their financial history and circumstances, but the recent credit crisis has seen lending by mainstream loan providers such as banks, decline.
As such, applying for a loan when saddled with a bad credit record, can be next to impossible, and incredibly frustrating.
Typically, a bad credit borrower will then find themselves forced to turn to a growing number of bad credit lenders who make loans available to those who have been rejected by banks. However, this is not without controversy. Payday lenders have been lending to more people than ever, but horror stories of spiralling debts due to high APR rates and continued extensions of the loan term have attracted much bad press about this type of lending.
So is it possible to find an alternative to a payday loan? Well, one new product growing in popularity for credit applicants with a shaky credit history, is the guarantor loan.
The guarantor loan enables the borrower to take out a loan by having a third party (normally a friend or family member) guarantee the loan, to protect the lender from the likelihood of the borrower defaulting on repayments. Put very simply, instead of assessing the borrower on the basis of their credit score, the lender replaces assessing the applicant on their credit score, with the trust that the guarantor has for the borrower in repaying the debt.
How A Guarantor Loan Works
The borrower is the applicant, and will apply for a loan in the normal way. They are then asked to give details of their guarantor.
The guarantor must be over 18 or 23, depending on the lender, and typically a homeowner, with a reliable income, and a good credit record. The lender then makes credit checks on the guarantor, and usually releases the money to the guarantor themselves, to prevent fraud. After the initial application, the guarantor need do nothing more, unless the borrower defaults.
It is also worth remembering that the loan is a legal contract, and the guarantor must of course, fully understand their responsibilities. Benefits to Guarantor Loans
Guarantor loans offer three significant advantages over payday loans and other bad credit short term loans.
Firstly, the borrower is able to borrow at a lower APR rate. The lender is not taking as much of a risk with a guarantor in place, and is therefore able to offer more favourable rates than other bad credit lenders, saving the borrower money.
Secondly, the loan can be paid off early without attracting penalties, and interest is calculated on a daily basis, so the more of the loan that is paid off, the cheaper the loan becomes.
The other benefit is that the borrower is taking out the loan in their own name, and should, therefore, be able to start repairing their bad credit history if the loan is successfully paid off in time.
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