The unsecured loans are becoming more popular as the cap rates of secured loans increase. The first most common type of unsecured loan is a payday loan. People can get short-term loans of small value without requiring a security or collateral. The second most popular type is a guarantor loan. In these types of loans, people convince a closed one to become the guarantor. If the borrower does not repay the loan amount, the guarantor becomes obliged to make the repayments. The only problem with this type of loan is to convince someone to take responsibility and become the guarantor. The third most popular type is peer-to-peer loan. In this type, the borrower borrows money from a loved one. The interest rate is usually low in P2P lending.
Considering the aforementioned scenario, the guarantor loans seem to be the best options for people with bad credit score. Following are a few common myths about guarantor loans.
You Can Get a Specific Amount of Money
The government or private loans have a fixed cap rate. People can also choose adjusted cap rate. The government authorities mostly run these types of loans, which is why, people need to show the equity of their need. For example, if you want to get government-aided mortgage for purchasing a home then the lender will calculate the home equity to decide the loan amount.
The payday loans have small range of money i.e. £70–£10,000. The interest rate on payday loans is usually very high. However, there is no limit on the amount of guarantor loan. People can lend as much money as they need. The time of return also varies from a few months to several years. Therefore, people take guarantor loans for making the down payments of their homes and purchasing cars.
The Guarantor’s Collateral or Credit Report will Secure the Loan
The role of guarantor in guarantor loans is often over-conceived by many people. Interestingly, the guarantor’s role begins only when the borrower fails to repay the loan amount. This is why, many lenders ask the borrowers to seek legal advice before getting a guarantor loan.
For your convenience, here is an explanation of the guarantor loan. The guarantor signs the loan contract with the borrower. The creditor will check the credit report of the borrower only. The guarantor will not provide any property for security or collateral to get the loan approved. The only security in guarantor loan is the agreement signed by the guarantor. The guarantor’s credit report is also not important in the guarantor loan however, the guarantor’s credit score will be affected if both parties fail to make the repayment. The loan will be entered on the guarantor’s report just like any other loan. However, the guarantor will not become bankrupt if the borrower borrows money for a business loan. Usually, the lenders do not provide guarantor loans for business purposes.
The Guarantor Will Repay the Money
As explained earlier, the guarantor’s role is often confused in guarantor loans, especially when the guarantor is a financially independent parent, sibling, or spouse. The planning of a guarantor loan is highly important. Remember that the borrower is responsible for the repayments, and not the guarantor. The lender will send a legal notice to the borrower if the borrower does not make a repayment. The borrower can stop the legal process by staying in contact with the lender, or at least inform the lender about the reason of non-repayment. Ideally, the borrower should stay in touch with the lender and request for the extension of loan repayment deadline.
The lender will only contact the guarantor if the borrower does not contact them, reply to the legal notice, or escape away. The lender will ask the guarantor to make the repayments. Remember that the guarantor becomes responsible for making the repayments only if the borrower does not reply to any of the legal notice. The guarantor may also deny to make the repayments. In this case, the lender will take the borrower and guarantor to the court.
Sometimes, the borrowers settle the case outside the court by signing up for a new guarantor loan. This loan is used to return the old loan. However, the interest rate on a new loan is usually higher than the old loan. The interest rate depends on the choice of lender. Some lenders may also approve of deadline extension without asking for extra interest. However, the lending industry has become a commercial business, which is why, such kinds of favours are rare.
The Guarantor Will Lose Credit Score
The guarantor loan does not show on the guarantor’s file before loan default. A loan defaults when the borrower does not make many repayments and the lender sends the borrower at least three legal notices. If the borrower fails to repay one or two instalments only, the guarantor loan will not show up on the credit report of the guarantor. The loan will not affect the guarantor’s credit score. However, it will affect the credit score of the borrower.
Parents Can Become Guarantors of Their Kids for As Long as They Want
Peer-to-peer lending is a unique kind of loan. In this loan, the borrower borrows money from a loved one on low interest. However, the chances of losing your relationship are high in P2P lending, due to non-repayments. In peer-to-peer lending, the non-repayment of money may show up as a gift on the credit report of the lender i.e. parents. When the lenders apply for old age government-aided benefits, the gifts may decrease the eligibility of parents for the benefits. This is why, most of the parents choose guarantor loans. Many parents lend small amount of money to their kids for their small needs. However, a guarantor loan is useful for purchasing the home for the first time also. In this case, the parents cannot become guarantors for long-term. The parents need to withdraw their guarantee and money after a few beginning years.
The Interest Rate is Always High
The interest rate of guarantor loan depends on the choice of the lender. There is no specific cap rate of the guarantor loan. Usually, the lenders charge around 20% of the capital as interest. However, you may negotiate to reduce the interest. The ideal way to reduce the amount of guarantor repayments is to negotiate on the annual percentage rate.
The unsecured loans do not require collateral. The lender evaluates the credit report of the borrower and considers the guarantee of guarantor as collateral. However, the negligence to make the repayments may impact the credit score of borrower and guarantor. You can get further understanding about guarantor loan and other types of unsecured loans from Quiddi Compare.