If you live in the United Kingdom, you may have heard of guarantor loans. They are extremely popular amongst people with poor credit scores. Even people with no credit history at all apply for such loans. It is a great way to build up some good credit. These loans are very similar in nature to payday loans. Both types of loans are unsecured and can be processed very quickly. You don’t have to go through a long waiting list in order to file an application. Moreover, the processing times are also very fast.
If you file an application in a bank, you have to wait for at least a couple of weeks to get a response. Here, the application is processed within one business day. By the end of the day, the company can deposit the loan amount into your bank account. The only major difference between payday loans and guarantor debts is the fact that the latter require a third party. In order to take on a guarantor debt, you will need somebody to provide a guarantee.
The guarantor is responsible for making the payments in case the borrower defaults. Since companies generally give such loans to people with poor or no credit history at all, they want to make sure that their investment remains safe. That’s why you will need a person to co-sign the loan agreement. Thus, no other collateral is needed. However, this is just a very idea of how guarantor debts really work. Here are a few more things that you should know about such types of loans:
Who Can Be a Guarantor?
Ideally, you can ask a distant relative or a close friend to serve as the guarantor. Nobody from your close family can serve as a guarantor. For instance, you can’t ask your sister, brother, mother or father to be a guarantor. Furthermore, the guarantor must be a person who owns a house in the UK. Needless to say, the guarantor must have a stellar bank record. Their credit history should be good enough. The guarantor should not have missed any payments on their mortgage or credit card dues.
The guarantor should be employed by a reputable organisation, and should be paid a decent amount. Ideally, the amount should be more than enough to cover the loan instalment. Before the application is processed, the company will carry out an affordability assessment. This is designed to check whether the guarantor can make the payments or not. In case the company doubts the guarantor’s financial position, they will not approve the application.
Secondly, the guarantor must be someone who is between the ages of 17 and 78 at the end of the term. This is important. In case the guarantor exceeds the 78-year-old mark at the end of the term, the company will not approve the application. Remember, the job of a guarantor is to supplement the borrower’s application with a good credit score.
Sometimes, they may even be required to show bank statements and pay slips. The company wants complete assurance that their money will be paid back on time. Most importantly, the guarantor must have a regular income. If the guarantor has been employed at any organisation for more than a year, the chances of acceptance are very high.
The Interest Rates
Before you apply for any guarantor loan, you should consider the interest rates. These loan products are specifically designed for people who have a bad credit score. Because the company is taking on much bigger risk as compared to the rest of the market, they will also charge much greater interest. Companies want assurance that their money will be paid back on time, with interest. In some cases, the interest rate can go as high as 45% per annum.
Are you sure that you can pay the loan amount on time? In case you miss a payment, the interest will simply be compounded further. This will only make your life more difficult. Before applying for a guarantor loan, carefully assess your future cash flows. Ideally, the payment period can be extended up to a year. Make sure you weigh the pros and cons before you send in your application.
The Application Process
One of the biggest advantages of selecting a guarantor loan as compared to a bank loan is the application process. If you are caught in an emergency and need a quick injection of cash, you can get some in less than a day. All you need is a guarantor to sign the loan agreement with you. It takes five minutes to fill up the form. Most companies even offer you the opportunity to fill up the form on their website.
Once the form has been filled up, the next step is to bring in the guarantor. The guarantor will be required to furnish details about their income. They might be asked to show their bank statements and recent payslips. The company will then carry out an affordability assessment in order to determine whether the guarantor can pay the loan in case the borrower defaults.
Once the guarantor passes the affordability assessment, they will be sent a form. The company may choose to send the form by post or through an email. Once the form has been filled out, it takes less than one business day to get the money. Some companies allow you to apply online directly. It only takes a few minutes to complete your application.
Now, if you were to apply for a bank loan, you would have to wait for a couple of weeks at least for a definitive answer. Even then, the chances of rejection are very high. Ever since the economic crisis, banks have become very cautious. They carry a lot of background checks before approving the application. All of this can take a pretty long time. Thus, bank loans are not viable in emergency situations. If you have reliable friends who can act as a guarantor, these loans offer a great alternative.