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.
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.
Comparing the Criteria
Guarantor loans, just like this kind of secured loan, don’t require the applicant to have a good credit score. In fact, both loan products are aimed at those who may have been turned down elsewhere. The obvious main difference is that the guarantor loan will require a person to stand as the guarantor, whereas the secured lenders will want something valuable put up as collateral.
Comparing the Amounts
The amount you’re able to borrow usually plays a large part in your decision process. If you need to borrow £2000 but you have nothing that’s worth this amount, then a secured loan may not be for you. This is because the loan amount entirely depends on the worth of the item you’re using as security.
Guarantor loans, on the other hand, don’t look at the worth of anything you own. Instead, they require you to have a friend or family member back up your application. As long as the guarantor is willing to help, has a decent credit score of their own and fits the criteria of the individual lender, then that’s a good start.
The amount that you’re able to borrow can also be determined by your ability to pay the loan back. For instance, if you apply for a large amount but do not have the means to keep up with the repayments, then you may be offered a lower amount so that you’re always able to pay your instalments in full and on time.
It’s important to research the different loans available to you before applying for credit, as a wrong decision could mean you’re saddled with debt that’s difficult to manage.