The Financial Conduct Authority conducted a crackdown on payday lenders in early-2015. According to the authority, the payday loans have become a loan cycle for the borrowers. People borrow payday loans to overcome their day-to-day expenses like paying bills and school fee. They borrow payday loans to repay the previous loans, and hence, it becomes a never-ending cycle.
As the choice becomes restricted, the borrowers look forward to other loans, which is why, the guarantor loan has become increasingly popular. Following is a quick guide on guarantor loan.
What is a Guarantor Loan?
A shared problem, as many people name it, a guarantor loan is the loan obtained on the guarantee of a person, especially if you have a low credit score. Simply put, when a borrower does not have sufficient credit score to obtain a loan, they either take out payday loan or convince a person to become their guarantor. A guarantor can be anyone. The borrower may choose their parents, children, or anyone who is not the borrower’s dependent to become their guarantor.
The Restrictions upon the Guarantor
The guarantor signs the loan contract along with the borrower. This way, the guarantor becomes responsible for loan repayment if the borrower fails to repay the loan. Most of the lenders contact the borrowers to make the loan repayments. However, if the borrower continues requesting for extensions, the lender is authorized to take the borrower to the court. If the borrower is not available, the lender may contact the guarantor to make the repayments.
The Credit Score
Credit score is not very important in the guarantor loan. However, the lender will check the credit report and scrutinize it for bankruptcy. The lender will check the credit report of the borrower and not of the guarantor.
If the borrower fails to repay the loan, the lender will contact the guarantor. If both parties fail to repay the loan, the lender may take both of them to the court. The failure to repay the loan will affect the credit report of the borrower as well as of the guarantor.
Who Can Apply for a Guarantor Loan?
Anyone with bad credit score can apply for a guarantor loan. The lender will check your credit report and calculate the credit score. The credit score will determine the interest on your guarantor loan. However, bear in mind that the interest on guarantor loan, payday loan, and any other loan obtained on bad credit score is always higher than other loans. It is done because the interest will function as the security.
The Cost of Guarantor Loan
For responsible borrowing, you must go through and understand the cost of guarantor loans. The important costs involved in a guarantor loan include Annual Percentage Rate, the duration of loan, Cash back, early Repayments, and Lender Fees and Charges.
- Make sure to ask the lender about all fees and calculate the total of loan amount. Sometimes, the lenders may charge you hidden fees.
- The annual percentage rate of a loan is issued by the regulatory authorities. The guarantor loans are private loans and the cost of APR is usually decided by the lenders. For guarantor loans, most of the lenders charge up to 49% APR of the loan amount. However, some lenders may charge lower amount. To find the lenders with low fees, make sure to compare the costs using a reliable resource.
- The interest rate in guarantor loan works similarly like the mortgage loan. The principle increases and the interest decreases with time. Make sure to discuss the flow of capital and interest with your lender.
- The interest rate greatly depends on the loan duration. In guarantor loans, the duration of loan repayment ranges from 6 months to several years. An early repayment of the loan may cost you a penalty. Discuss the penalty of early repayment with your lender and find out the total of loan repayment including hidden fees and early repayment penalty.
Is There Any Protection for the Guarantor?
The guarantor signs a contract with the borrower. This contract authorizes the lender to seek for different legal ways for loan repayment, including taking the guarantor to the court in extreme cases. Remember that the guarantor does not enjoy any protection after signing the loan contract.
When applying for a guarantor loan, make sure to receive a copy of documentation from the lender. The documents include all details regarding the hidden fees, costs, charges, loan duration, penalties, and more. The fraudulent lenders may tweak the documents if you do not obtain the documents from them.
Limiting the liability may make you stress-free. You can limit the liability by putting a property as collateral or increasing the amount of first instalment of loan.
Always research the market and compare the prices offered by different lenders. The amount of loan greatly depends on the APR of loan. The highest APR offered by the lenders is 50% of the loan capital. However, some lenders offer low APR also. By decreasing the APR, you can decrease the total of your loan repayments.
You can improve your credit score by repaying the guarantor loan on time. Therefore, borrow only what you can repay. If you fail to repay the loan, you may lose up to 100 points on your credit report.
For comparing the prices and costs of mortgages, guarantor loans, payday loans, and other loans, or getting information about credit cards and bank accounts, visit Quiddi Compare.