By Nigel Norman, Marketing Administrator at Logbook Loans provider Auto Advance, which is a member of the Consumer Credit Trade Association.
Guarantor loans have many pros and cons in providing a solution to help people with bad credit quickly access a flexible, low-interest, loan and rebuild their credit history. As with any form of short-term finance, there are pros and cons.
If you don’t meet the criteria for a standard bank loan, or are judged as a poor credit risk, your application will be rejected. A guarantor loan, offered by banks and other lenders, can be a workable alternative for people with poor credit. All you need is a friend or family member to agree to make payments on your behalf if you can’t repay the loan.
The Good News
- Flexible and fast – guarantor loans can be tailored quite well to how much money you borrow and the time you can take to pay it back. You might be offered one to five-year loans, ranging from £500 to £10,000, depending on your financial capabilities. Your application could be approved within a day as long as you meet the criteria, and won’t be slowed down by an investigation into your credit history or documentation.
- Low interest – while the APR will be higher than a standard bank loan, guarantor loans generally have much lower interest than other bad credit loans, such as payday loans. The APR is usually around 50%, compared with that of a payday loan, which can be around 400% to 1,000% or more.
- Credit rebuilder –they can be used to help rebuild your bad credit history by allowing you to sort out your finances. Your payment activities will be reported to credit agencies and will show up on your credit file as a standard loan, so you will appear financially capable be able to and demonstrate you’re a responsible borrower by making the arranged repayments on time.
The Bad News
- Finding a guarantor isn’t easy – your loan guarantor must have a good credit history and prove they can repay the loan if you can’t. They must also be a homeowner and not financially linked with you, nor living at your address. It may also be challenging to find someone who believes in your ability to pay the loan back, which may put people off if they think they’re going to be out of pocket.
- Guarantor credit check – these are similar to standard credit checks for bank loans, which means your guarantor’s credit must be good enough for the loan to be approved. While you may feel they fit the guarantor role well, they will be turned down if their credit isn’t up to scratch. They may also need to provide bank statements and other financial details to prove they can afford the loan repayments and make them on time, which they may find invasive.
- Risk to friendship – this kind of arrangement means that if something goes wrong, it isn’t just your finances that could suffer. The relationship you have with your guarantor could be tested if they have to take over your repayments. The guarantor is only freed from making these payments once the loan is paid off in full, which can even make it difficult for them to take out a loan if they need to. All this could put a strain on a friendship.
Make an informed decision
Guarantor loans suit some people and not others. There are a number of other options for short-term loans if you have bad credit – for example Logbook Loans don’t require a credit check either – but remember to investigate how each potential solution affects your individual situation.