If you have poor credit, or even just a limited credit history, it can be extremely difficult to qualify for a loan. Even if you do manage to find a lender who is willing to put you on their books, chances are your troubled credit history will leave you saddled with such a high interest rate that your debt becomes unmanageable. Fortunately, there is an alternative for people with compromised credit histories. A guarantor loan makes it possible for people with no credit, or even bad credit, to qualify for an unsecured loan.
What is a Guarantor Loan?
A guarantor loan is an unsecured loan in which a second party acts as a guarantor. In other words, someone with a strong credit history vouches for you, and promises to assume the loan should you default on payments. With a guarantor loan, applicants can borrow between £1000 and £7500, over a term of one to five years. Guarantor loans not only help people with poor credit borrow the money they need, they give them a chance to rehabilitate their credit histories. However, like any loan, a guarantor loan is a great responsibility, and you need to make sure you are getting the best deal possible.
Know Your Credit Rating
While guarantor loans were developed to answer the needs of borrowers with troubled credit histories, it is still important to know your current credit rating. For instance, if you have a limited credit history but no marks against you, you still rate as a high risk borrower. However, because there are no defaults in your history you may be in a position to borrower more money on better terms. Knowing your credit rating will give you more room to negotiate.
Every lender puts restrictions on the amount of money that can be borrowed via a guarantor loan. As you begin your search for a suitable lender, check out their borrowing limits. This will help you to quickly eliminate lenders who, though they may offer an attractive deal, simply cannot provide you with the loan amount you need. Checking out the borrowing limits up front allows you to quickly narrow the lending field.
Consider the Loan APR
The Annual Percentage Rate (APR), is the amount of interest your loan will accrue over the course of a year. It is vital that you fully understand your loan’s APR before signing any contracts. Keep in mind that lenders advertise their services using a ‘representative APR’. This is simply the average APR offered to the majority of their customers. It does not mean that you will necessarily qualify for that interest rate. This is where knowing your credit rating can come in handy. Even if your credit history is compromised, you may still be able to qualify for a lower APR, and you may need to check out a number of different lenders before you find the best interest rate available.
Along with APR, this is one of the most important facets of your loan to consider. Simply put, the longer the repayment period of your loan the more you will be paying in interest. However, a longer repayment period also means lower monthly payments. While a shorter repayment period allows you to save money on the overall life of your loan, the higher monthly payments may make it more difficult to manage. Before signing any contracts, you need to balance what you can afford to pay each month against how much money you want to save in interest payments. Take your time, and run the sums.
Fixed or Variable Rates
Whenever possible, choose the loan that offers a fixed rate of interest. A low starting variable rate may be tempting, but remember that that rate can jump at any time and you will be faced with payments that are beyond your budget. A fixed rate lets you calculate exactly how much interest your loan will accrue, and how much your monthly payments will be.
Finding a Guarantor
A guarantor must be between the ages of 18 and 70. They should own their own home, and they must have a very good credit history. Typically, guarantors are family members, but they can also be friends or business contacts. Keep in mind that your guarantor is putting their credit rating at risk by helping you, and they are agreeing to assume your loan should you default. When asking someone to be a guarantor on your loan, don’t take it personally if they refuse. They have their own financial situation to consider. Also keep in mind that your guarantor must be privy to your loan agreement, and must sign off on all of the terms and conditions.
The Fine Print
Finally, both you and your guarantor must read, and understand, the fine print of your loan agreement. Check for any hidden fees. There may be a charge for setting up the loan, and there will definitely be penalties for late payments and defaults. There may also be fees associated with early repayment, which you and your guarantor will have to balance against what will be saved by paying off the loan ahead of schedule.
Guarantor loans can be a good alternative for people with poor credit; and they can allow you to not only borrow the money you need but also to restore your credit rating. However, as with any loan it is important to do your research. Compare and contrast lenders before choosing the one that best suits your needs and financial position. And if it is unclear, study online resources to better understand the loan process.
This is a guest post by Joe RoosEvans. He is an industry veteran who has built one of the nations’ most successful Independent Marketing Organizations.