Last week for Finance
Fridays we were looking at how to deal with being refused credit. For this week we're talking
about a type of loan you can take out once you have been accepted for
credit.
Years ago the personal loans
market was much easier to understand as there were fewer products and
types of loans you could apply for. If you found you had problems
being accepted for a loan there was no real alternative options for
you. Now the loans market has expanded to take into account the more
complex nature of people's financial and personal situations. Let's
have a look at one of those options known at guarantor loans.
What is a guarantor loan?
- If you find you have problems with your credit rating then a
guarantor loan may be the solution for you. Rather than securing the
loan with an applicable asset such as a car or property you agree
with another person to guarantee repayment of the loan if you are
unable to make the repayments. Usually this person will be a good
friend or family member.
Interest rate level -
Due to the nature of guarantor loans interest rates can be higher
than standard loans however they are no where near the level of 'pay
day loan' providers. They are designed to be paid off over months and
years rather than days. Rates typically range from around 39.9% with
companies such as UKCredit and up to around 59.9%. Interest rates can often differ depending whether
you and/or your guarantor are a homeowner or a tenant.
Service fee – Some
credit providers will charge a service or upfront fee when you take
out a guarantor loan. This will be a percentage of the loan amount
you take out. Obviously this could have a big effect on how much you
have to pay and you could struggle with the initial payments. Always
make you sure you do business with a company authorised and regulated
by the Financial Conduct Authority (FCA) and are members of the Finance and Leasing Association.
Being a guarantor –
You can't be a guarantor for someone if you are already financially
linked to them, therefore spouses, domestic and business partners are
usually ineligible. As the guarantor you will need a good credit
history to be accepted. Before agreeing to be a guarantor be aware
of the financial responsibility you will be taking on. Ask the person
who is taking out the loan why they need the money and show evidence
of how they intend to make the repayments. As the guarantor you will
be liable for any repayments and possible penalties if the loanee
defaults on the repayments.
Improving credit history
– Guarantor loans are usually for people with poor credit history.
If you do take out a guarantor loan and repay all the instalments on
time it can be a good way to improve your credit rating as it shows
you are now financially responsible.
Have you ever taken out a
guarantor loan? Would you act as a guarantor?
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I have never had to apply for a loan but this is really useful to read
ReplyDeleteThis is a hugely informative article! Many interesting points re guarantor loans.
ReplyDeleteUseful information, thanks! I've heard of guarantor loans before but had no idea how they worked.
ReplyDeleteReally interesting info, there really is so much research to do before jumping into getting a loan.
ReplyDeleteI remember my mum about being a guarantor on the first fridge I bought when I left home after uni. It worked out well and she was there to help me on a couple of difficult months but all came good and it got me on to the credit ladder
ReplyDeleteI don't think I'd want to be a guarantor for anyone - there's too much responsibility over something you can't control for me x x
ReplyDeleteI wouldn't want to be a guarantor for anyone, I am not even sure my kids are going to get me as guarantor!
ReplyDeleteIn Romania, this is the sort of loans my parents would have taken back in the day, before the credit cards and all that game came into being. The interest rates are huge, I hadn't realised that and I would not want to put anyone under that strain if anything happened to me so no, I would never take a guarantor loan.xx
ReplyDeleteThose are still high interest rates aren't they - so I would only do it if I was in dire straits!
ReplyDeleteI wouldn't want to be a guarantor for anyone .
ReplyDeleteYour finance posts are always educating. Guarantor loans are a big responsibility for the person who chooses to be the guarantor. Also the interest rates are so high that one would need to be in a dire need to consider such loans.
ReplyDeleteGosh hard to ask someone to be a guarantor...or to be one. Great post with all the information.
ReplyDeleteI had a guarantor loan when I was younger. They are a great idea for people with no credit history
ReplyDelete