When it comes to borrowing money, there are a variety of lending options available. Guarantor loans are one option that has become increasingly popular in recent years. However, before deciding on a guarantor loan, it’s important to understand what other options are available and which one may be the right fit for your needs. We’ll take a closer look at what guarantor loans are below, and how they compare to other types of loans offered by a variety of lenders.
What is a Guarantor Loan?
A guarantor loan is a type of loan where a family member or friend agrees to act as a guarantor and take responsibility for paying back the loan if the borrower is unable to do so. This type of loan is typically used by individuals who have a poor credit history or are unable to obtain credit on their own. Choosing a guarantor usually means asking someone close to you to put their name on a loan application so that the lender knows you are less of a risk. The guarantor that you choose will generally have a higher credit score and better credit history than the person applying for the finance.
Pros and Cons of Guarantor Loans
So, before applying, it helps to know more about the pros and cons of guarantor loans. There are several benefits that come with applying for this type of loan, including:
- Access to Credit: Guarantor loans provide access to credit that may not otherwise be available to individuals with poor credit history.
- Lower Interest Rates: Guarantor loans often come with lower interest rates than other types of loans, making them a more affordable option.
- Rebuild Credit: By making timely payments on a guarantor loan, borrowers can rebuild their credit history and improve their credit score.
However, when looking at the pros, you also need to consider the cons. There are some drawbacks that you should consider when it comes to applying for a guarantor loan, such as:
- Risk to the Guarantor: If the borrower is unable to repay the loan, the guarantor is responsible for making the payments. This can put a strain on the relationship between the borrower and the guarantor. It can also become difficult if the relationship between you and the person you chose as the guarantor’s relationship does not last.
- Limited Loan Amounts: Guarantor loans may not provide as much funding as other types of loans, making them less suitable for larger purchases.
- Longer Repayment Periods: Guarantor loans may have longer repayment periods, which can result in higher overall interest costs. You should make sure you’re fully aware of the repayment period and requirements before applying.
Other Lending Options
Before deciding on a guarantor loan, it’s important to consider other lending options that may be available. Some alternatives to consider include:
- Personal Loans: Personal loans are unsecured loans that can be used for a variety of purposes, such as debt consolidation or home improvements. They may be a good option for individuals with good credit history who do not require a guarantor.
- Credit Cards: Credit cards can be a convenient way to borrow money for smaller purchases. They may also offer rewards and cash-back incentives, making them a good option for individuals who can pay off their balance each month.
- Secured Loans: Secured loans require collateral, such as a car or home, to be put up as security for the loan. They may offer lower interest rates than unsecured loans but come with the risk of losing the collateral if the loan is not repaid.
- Payday Loans: Payday loans are short-term loans that are typically used to cover unexpected expenses. They often come with high-interest rates and fees, making them a costly option for borrowing money.
Which Option is Right for You?
When considering which lending option is right for you, it’s important to take into account your individual financial situation and needs. If you have a poor credit history or are unable to obtain credit on your own, a guarantor loan may be the best option. However, if you have good credit history and do not require a guarantor, a personal loan or credit card may be a more suitable option.
It’s also important to consider the amount of funding you require and how quickly you need it. If you need a large amount of funding, a secured loan may be the best option, while if you require a small amount of funding quickly, a credit card or payday loan may be more appropriate.