Nowadays loans are the wheels on which most start-up businesses and enterprises run on. But what happens when an aspiring entrepreneur can’t access any form of monetary boost from a financial institution due to a poor credit history?
The answer lies within a new form of credit line known as guarantor loans. As a risky borrower ( someone with little/no collateral or a bad credit report), securing loans or any other kind of financial grant can be an uphill task. Mainly because loan managers in banks are usually skeptical about lending a large sum of cash to someone who is likely to default payment later. Nevertheless, with a credible guarantor, most loan officers can give you the benefit of the doubt.
A guarantor is someone above the age of 21 years, employed and with a stable income, who can guarantee your monthly or annual repayment of the loan. Basically, what this means is that they endorse your bid of securing the much-needed financial aid. Guarantors can be friends or even family members who believe and trust you financially. Sometimes the simple fact that you’ve never borrowed money before might disqualify you as a credible borrower but a close confidant may still believe in your ability to repay the loan on time. If the other party ( the confidant ) has an exceptionally good credit history, they can vouch for you to access the loan by boosting your credit score.
But are there any real benefits of using guarantor loans in the UK, compared to other conventional loans? A look at the following list reveals so;
a.) There’s is no credit check done: Unlike using in other loans, co-signed guarantor loans do not require an extensive credit search to be done. Some banks may still conduct the search, but it usually isn’t a critical factor in securing the loan. This advantage is what makes it possible for first-time loanees and tenants to access funds in the first place.
b.) There’s a chance in boosting a poor credit score: Through a co-signed loan, the applicant gets a unique chance to boost their otherwise poor credit score through their guarantor. Since one can only qualify for such a loan if the guarantor has a high credit score, the creditors lending you the loan will relay this report to the relevant credit reporting agencies. As a consequence, your credit score improves in the process of getting the loan.
c.) You can borrow a comparatively larger amount: A co-signed guarantor loan has the added benefit of allowing a first-time applicant a better shot at getting a bigger loan. Unlike some payday loans, armed with a guarantor of a good credit score, you can access up to 6000 pounds from banks here in the UK.
d.)Unlike homeowner’s or car loans, guarantor loans are generally processed faster once the bank has received the relevant documentation. Sometimes it may take even less than 7 days.
But how exactly does guarantor loans work and how do they compare to other loans?
Unlike other forms of loans, there’s no form of hard collateral involved in securing guarantor loans, at least not anything physical. They are virtually unsecured loans. The creditor banks on the guarantor’s exceptionally good credit history to loan the applicant the money. Apart from being a UK citizen, the guarantor should also be in a position to keep up with the monthly or annual payment of the loan.
Normally, most people choose close friends or distant relatives as their guarantors. A close family member can also qualify to be a guarantor if only they don’t share any other credit with the applicant, e.g a mortgage. Most loan officers will also insist on cross-checking the employment or business status of the guarantor. Therefore, it’s best to choose a guarantor who has never filed bankruptcy. He also shouldn’t have a history of any court or legal actions taken against him, especially financial-related ones.
In the process of acquiring the loan, the guarantor might be asked to sign some papers and present some of his bank statements to the lending officer. This is usually just a formality to document the loan.
On the question of interest rates, unfortunately, guarantor loans are still taxed with almost the same or even higher interest rates as other loans. Mostly because of the lower security involved in the entire process. Nonetheless, the faster you repay the loan the less the accrued interest you will have to pay.