The market for guarantor loans exploded this year. Many thousands of people turned to this form of lending because, while the recession may have been over for four or five years, the major banks have continued to choke off credit to millions of responsible householders.
As a result, millions of people who would previously had access to a large number of loans have been effectively shut out of the credit market through no fault or their own. The strangling of credit is being achieved by the tightening of lending criteria as banks become ever more averse to any form of risk. Others may have found themselves unable to borrow just because they have been late with a loan repayment – sometimes by just a few days – at some point in the previous six years. Others might not have a credit history at all – they may just be out of school or university and never have applied for a loan or credit card before and so are just finding out that nobody is willing to consider them. They can’t get credit because they’ve never had it before making it impossible to even start.
Guarantor loans have provided a lifeline for many thousands of people over the last few years and are continuing to grow in popularity. They allow people with no or bad credit records to nominate friends, family members or even work colleagues to act as guarantors for loans. Having a guarantor gives the financial organisation the security of knowing that should the applicant’s circumstances change, then the loan will still continue to be repaid.
The major plus for the applicant with this arrangement is that having a guarantor means you’ll have access to lower fees and interest charges and higher capital sums than with other types of loan geared to people with poor credit ratings.
While most lenders do not run credit checks on the applicant, these are run on the guarantor so having somebody with a good record is a must.
The market is continuing to grow with new lenders offering guarantor loans every month.
That means that applicants are able to apply online and, where approved, the loan can be in their bank account within a day or two.
A means of repairing a credit record
One of the big positives of guarantor loans is that they provide an effective way for somebody with a poor credit record to repair the damage. While you may not be able to get an unsecured loan or a homeowner loan, the chances are that if you can find a guarantor, you will be able to apply successfully for a guarantor loan. Once you start making your repayments, this will be recorded every month on your credit record and, over time, start to turn it from bad to good or even excellent.
You may have a bad or non-existent credit record simply because you are young or you may have spent a lifetime saving not borrowing. In either case, you might find obtaining new credit a struggle. Meanwhile, people who have just got their first mortgage might have taken a hit on their credit reports because the major lenders will be considering the amount of credit you have compared with your ability to repay more. This is the reason that many people can find it hard to get back into the credit market when they have just bought their first home.
Guarantor loans are excellent options in these cases because the borrower can use the good credit record of somebody who is prepared to guarantee their borrowing to act as security.
This gives the applicant access to lower interest rates, higher sums and longer times to repay allowing a borrower to, in effect, use the sound credit rating of somebody that they know well who is prepared to act as security. It also means that their guarantor loan repayments will start to appear on their credit records and, the longer that they can make repayments on time, the higher their credit rating will become meaning that they will then stand a better chance when it comes to applying for loans on their own.
Larger sums on offer
While sub-prime unsecured loans are available to smaller amounts, guarantor loans can give you access to up to £12,000 of finance – particularly useful for people who have had a change in circumstances – perhaps a new bay, needing to buy a new car, wanting to consolidate existing debts or looking to redecorate their first home.
Guarantor loans can unlock these for you and get you through a difficult time when you are regarded as a risk by mainstream lenders. Having somebody with a good record act as guarantor potentially opens up a large market and means that you will be able to plan your finances for months or even years ahead. You’ll also have lower interest rates than with some other loans and you will know exactly how much you will have to repay in total.
If you are thinking about a guarantor loan
It may be a good idea to draw up a written agreement with your guarantor to avoid any problems later on should your circumstances change. The guarantor will also want reassurance that you are able to make the repayments. A written agreement may include a commitment by the applicant to keep the guarantor informed about their spending and any applications for other forms of credit. It may also include an agreement for full financial disclosure including a budget and bank and credit card statements.
Article written by Mike James, working alongside a selection of companies in the finance sector – including technology-led finance broker Solution Loans, who were consulted over the information contained in this post.