What are the Risks of Guarantor Loans?

A guarantor loan is a unique type of loan where money can be borrowed by someone with a poor credit rating and they will nominate a guarantor who will cover any payments that they miss. This can feel like a less risky type of loan because there will be less risk that the repayment will be missed. This can be a big advantage. However, there are still some risks of this loan and it is worth understanding them so that you can decide whether you think that they are relevant to you and to consider what you can do to reduce the risks.

Risk of not being able to repay

With all loans, there will always be a risk that you will not be able to make all of the repayments. There are ways that you can lower this risk though. Firstly, if you choose a bad credit loan where the repayments are small but there are more of them, then this might mean that you will be able to repay them more easily compared with having larger repayments. It is therefore well worth making sure that you are aware of how much the repayments will be. You will then be able to calculate whether you will be able to afford them. You can do this by taking a look at your previous bank statements and seeing how much money you would normally have available and whether this would be enough to repay the loan. Although you have a guarantor to help you, it is worth understanding that a missed payment by you will still be noted on your credit report and it may mean that you incur extra charges on the loan. It is also likely that you will not want your guarantor to have to pay for you unless you really have to.

Risk of guarantor not being able to repay

There is also a risk that the guarantor may not be able to cover the cost of their repayment. This is less likely as you would hope that they would check this before they agreed to sign up. However, they may have just assumed that they would not need to make any repayments and so not allowed for it. It might be worth you checking with them before they sign up and making it clear that you want them to check that it will be something that they can afford. There is a small chance that they may need to make every repayment and they will need to be prepared for this.

Risk of falling out with guarantor

If your guarantor has to make a repayment or more than one, they may have expectations that you will repay them as soon as possible. If you cannot afford to do this then they may not be happy with you, especially if they are getting into financial difficulties as a result. Therefore, it can be good to avoid this by having an agreement before you sign the loan agreement. It is a good idea to get together and discuss what your expectations would be in the case of them making one or multiple repayments. They might be happy to just cover the cost and not expect you to pay them back. Whereas it is more likely that they might want their money back. It would be sensible to come to an agreement that you repay them once you have paid off the loan, so that you can afford it. If you have to make the loan repayments and repay your guarantor as well, you might find it a huge financial struggle. It can therefore be worth trying to explain to them that you will be better off repaying it at the end. Ideally you will come up with something in writing so that you can refer back to it if there is ever any disagreement about it. It is also wise to carefully choose a guarantor that you know will be easy going and is unlikely to fall out with you over these sorts of things.

Risk of falling out with others

There is a small possibility that others may fall out with you over this as well. This is because you might find that they will be jealous. If they want a guarantor loan as well, but cannot use the guarantor you have used because they have signed up to help you, they might be jealous that you will be getting help and they will not be. This will only happen if they find out about your arrangement, if they need the same sort of help and cannot get it and if they are the jealous type. However, it is worth thinking it through as it could lead to a difficult situation and you will not want this to happen to you.

What are the Differences Between Short Term Loans and Conventional Loans?

It is likely that most people will know a fair bit about conventional loans. Most of us will know about mortgages, personal loans, credit cards and overdrafts and may have even used some or all of them or know people that have used them. This means that if we need to borrow money, it might be these more familiar loans that we will turn to. However, there is now quite a selection of short-term loans that are available for borrowers and it is wise to understand more about these as well. This is because you never know when you might need to use a loan and if you know more about all of your options you will be more likely to make a good choice for you. Therefore, it is good to start by understanding what the main differences are between the short-term loans and more conventional ones.

Credit rating

A short-term lender will not worry so much about your credit rating compared to a more conventional lender. Normally a lender will take a look at your credit report to see whether they think that they will be able to trust you. They will look at your history of borrowing to see how well you have managed to repay loans in the past. They will also look at whether you are good at keeping up with regular payments by analysing your commitment to paying rent, contracts or regular bills such as utilities. They might look at your income as well to see whether it looks regular or not. If your credit history does not look good for any reason, then they may decide not to lend to you.

A short-term lender will have a different approach. Although they do a credit check, they only look at a few things They will want to make sure that you have income coming in regularly so that you can repay. However, they will not be concerned with how high risk you are. In fact this type of loan was set up to help borrowers who have a poor credit record and cannot borrow money elsewhere.

Speed to organise

Often a loan can take quite a time to organise. As well as the time taken to do a credit check, lenders will also have to check your identification by looking at documents to prove your address and that you exist. They will also have to process all of the information and many will work just on weekdays between 9am and 5pm.

Short-term lenders will often be a lot quicker, partly because they do a less thorough credit check (although their identity check has to be through). They also are often open all of the time, so that not only give them more time for processing applications but means that you will be able to get money outside of working hours should you need to.

Lenders

If you go for a more conventional loan then you will tend to know most of the possible lenders. Often, they will be banks and building societies that have branches on our high streets or that advertise a lot. As we have heard of them, it could make us feel that we can trust them more.

Short-term lenders tend to be less well-known and therefore we may feel that we cannot trust them so much because we do not know them so well. However, it is wise to think about this carefully. Just because we know of a bank because we walk past a branch every day does not mean it can be trusted any more than the one we have not heard of. It is worth researching both to find out more about them before deciding which you will want to go with.

There are some quite significant differences between the types of loans and it is worth understanding what these are. If you have a poor credit rating or need money quickly then the short-term loans might be more useful for you than more conventional loans. Therefore, it is worth considering them even if you have not heard of the lenders. Just because you have not heard of them does not mean that they will not necessarily be as good as conventional lenders, it will vary between different lenders. Therefore, you need to make sure that you identify what your borrowing needs are and find the lender which is the most suitable for these. Try not to discount any lender until you have thought about them in detail as this could mean that you will be rejecting one that is really suitable for you. You need to think about which matches your needs. It is wise to then compare the lenders on value for money, calculating how much they will cost you, how easy you will find it to make the repayments and what the lender seems to be like. It will take a bit of time to do this research but if you are already aware of the different types of lenders, this will allow you to make a more informed choice.