Over the years, the process of borrowing money from a bank has undergone a lot of changes. Before the introduction of credit reports, you usually had to either know the banker personally or have someone who could vouch for you. Otherwise, the banker had no way of knowing whether or not you were trustworthy. Of course, the process of taking out a loan today is much different. Most lenders rely on a borrower’s past credit history to determine whether or not they qualify for a loan. For situations where a borrower either has had trouble in the past with their credit or doesn’t have a well-established credit history, they still may be able to qualify for a loan by working with a guarantor. In essence, these loans require someone with good credit to sign on as a guarantor for the loan. That means that they will take over payments if the borrower defaults.
These loans offer a number of benefits – especially when compared to other borrowing options like payday loans. They can be a good option for people who may otherwise have trouble getting approved for a traditional loan. Here are some of their advantages:
* Fast approval. Typically, loans that are secured by a guarantor are approved within a day or so of the application being submitted. That means that you can get your money quickly.
* Higher loan values. There are laws regulating payday loans, requiring them to be under a certain amount of money. Guarantor loans, on the other hand, usually don’t have any of these restrictions in place. That means that you can borrow a much larger sum of money than you could with a payday loan.
* A longer loan term. Payday loans are designed to be paid back quickly. In fact, they usually have to be paid back in a single pay period. Loans that are secured by a guarantor, on the other hand, are usually paid back over a period of years, resulting in lower payments.
* A more reasonable interest rate. Payday loans are notorious for having extremely high interest rates. In fact, regulations had to be put in place to keep the lenders who provide these loans from taking advantage of borrowers. Most guarantor loans, on the other hand, charge much lower interest rates, making them easier to pay back.
* Fewer problems with defaults. According to guarantor.co.uk
there is no comparison between the number of people who default on guarantor loans versus those that default on payday loans. In fact, from 2012 to 2015, Citizens Advice reported nearly 55 times more problems with people defaulting on payday loans than guarantor loans.
Even given all of these benefits, guarantor loans still are not perfect. As with any loan, it is important to be informed before applying. This goes for both the person borrowing the money and the person agreeing to be the guarantor. Here are some of the problems associated with these loans:
* Undue burden on the guarantor. Many lenders fail to properly vet borrowers, instead relying on the guarantor to take over payments if any problems occurred. Because of this, many guarantors find themselves in the unfortunate situation of having to take on the loan payments themselves since the borrower should never have been granted a loan in the first place.
* A lack of understanding by the guarantor. When these loans first came out, guarantors often were not properly informed about their responsibilities. For instance, some guarantors didn’t fully understand that they were responsible for taking over the loan payments if the borrower defaulted. Instead, they thought that their signature was simply to vouch for the borrower.
*An increase in the number of defaults. The data received by Citizens Advice shows that there has been an increase in the number of people defaulting on these loans. This could be due to the fact that a larger number of these loans are being given.
* High interest rates. Although the interest rates on these loans are lower than payday loans, they are still higher than traditional loans. This can put a tremendous burden on the borrower as they try to pay back the loan by making their payments higher than necessary.
* Relationship problems between the guarantor and the borrower. Oftentimes, these loans can cause problems between the borrower and the guarantor. After all, if the borrower stops paying, the guarantor has to take over for them or risk having their credit ruined. This can cause a tremendous amount of tension.