Comparing Guarantor Loans to Secured Loans

Since the recession hit in 2008, the alternative loan market has exploded. This is because many banks and high-street lenders have tightened their criteria, meaning that they have been refusing to give money to people who had a less-than-perfect credit history. This obviously left out a lot of potential customers, as a perfect credit history has become increasingly uncommon since the credit crunch. If you’re new to the loan market, then you may find the huge variety of options a bit confusing. Guarantor loans, logbook loans, bank loans, unsecured and secured…what does it all mean?

Comparing the different types of loans with each other is a great way to work out which are the best options for you. There will be many different costs involved depending on the type of loan, and the application criteria can be very different from product to product. In this article, we’ll endeavour to compare guarantor loans to the different aspects of secured lending for those with a less-than-perfect credit history.

What’s the Difference?

Guarantor loans are a type of unsecured lending, meaning that the loan amount is not backed up by an item of property (a house, car or other valuable item) owned by the applicant. Instead, the lender asks that a guarantor signs up along with the person who wants to borrow the money. By doing this, they’d be agreeing to cover the loan payments, should any problems arise during the loan term.

A secured loan, on the other hand, doesn’t involve another person at all. The loan is secured against the value of an item, meaning that, should anything happen which means the borrower is unable to pay their loan instalments, the item in question could be seized by the loan company. A mortgage is a type of secured loan, as if the homeowner is unable to pay the instalments, the house could be repossessed by the bank.

Guarantor Loans

Comparing the Cost

As secured loans and unsecured guarantor loans are very different, there’s usually a big difference in how much it costs to borrow money from each. Guarantor loans usually have an APR (annual Percentage Rate) of around 50%.  This number shows how much, as a percentage of the loan amount you take out, will be added to the loan in interest and other fees.

Secured loans often cover pawnbrokers, logbook lenders and other similar loan products. As these are geared towards those with a poor credit history, yet without the guarantor to back them up, the cost of a loan like this can be much steeper. A typical logbook loan (secured against your vehicle) can be around 450% APR, whereas an online collateral loan (which acts the same as pawn broking) can command anything upwards of 80% APR.[Continue Reading…]

Guarantor Loans – A Cheaper Way to Borrow

Over the previous few years, the popularity of guarantor loans has significantly increased due to their suitability as credit builder loans for borrowers who find themselves with a less than stellar credit history. Guarantor loans offer a far cheaper alternative to other variations of bad credit loans such as payday loans but as with all credit agreements, it is crucial that anyone looking to make an application fully understands the agreement into which they will be entering.

Lenders who specialise in credit for those with poor credit histories such as TFS Loans offer a myriad of financial options which generally have much higher interest rates attached to their products than when compared to the credit offered by high street lenders, such as banks and building societies. Because the associated APR with guarantor loans is generally much lower than many of their bad credit counterparts, a guarantor loan very often proves to be the best choice for anyone looking for the cheapest form of credit available to them.

Of course prevention is better than cure. A good starting point before taking out your first loan is a bank borrowing power calculator and keep a buffer between what the bank says they will lend and the amount you borrow. That will help prevent you getting too stretched financially.


Perfect for Applicants with a Poor Credit History

It is worth noting that guarantor loans are just one of the options available to borrowers with a poor credit rating but it is worth outlining exactly why they may prove to be the ideal choice in this area.

There are a number of reasons why a potential borrower may have the millstone of a poor credit history around their neck and it is not always related to having defaulted on payments in the past, although this is obviously a common reason for poor credit ratings. Credit ratings can be less than ideal if the borrower has recently moved house or has just taken a new job. It is also possible that if the borrower still lives at home with their parents or has never taken credit out before, their credit rating will also be poor. Regardless of whether it seems to be fair or not, possession of a perceived ‘bad’ credit rating can have a stigma attached to it which is often unfairly given to those who are affected.

Guarantor loan lenders are renowned for considering those who have a less than perfect history because of the presence of a guarantor who will act as security for the loan repayments. Due to this, they are far more likely to make credit available to borrowers where banks would be likely to turn down the application.

Rebuilding Credit History

Credit histories and ratings are based almost entirely on past financial behaviour, so being able to demonstrate that debt can be well-managed is a crucial factor. Guarantor loans are generally repayable on a longer term basis (ranging from 1 year to 5 years) which helps to keep the monthly repayments at a manageable level. This in turn means that borrowers can add a period of prolonged, well- managed debt to their credit histories. Assuming the repayments are all made in full and as scheduled, a guarantor loan customer can fully expect their credit rating to improve over the duration of their loan.