Poor credit can be a significant obstacle to receiving a loan. Lenders judge the eligibility of a potential borrower against their past credit history. This history is determined by their prior ability to pay back loans, as well as their use of credit cards. Many people suffer in the terms of credit card debt, which can drag down their credit rating. As a result, borrowers find themselves in a situation where there is very little they can do to improve their rating, other than to take on more credit cards with higher rates of interest.
Guarantor loans represent an option for borrowers with this problem. A guarantor loan effectively works as a secured loan. In a secured loan, the value of the payment to a borrower is set against the value of an asset like a house by the lender. If the borrower defaults on their payments, and is unable to repay the principal of the loan, the asset used to secure the loan becomes the collateral that the lender can seize. By contrast, unsecured loans do not require assets, but do have higher interest rates than secured loans. Borrowers with poor credit can often only receive access to very high interest personal loans that do little to improve their credit rating.
This problem can be resolved through a guarantor loan, which represents a type of secured loan, but with the asset used to secure the payment represented by a third party. This person, who is most often a family member or friend, has a strong credit history and property to use as collateral. As a guarantor, they agree to repay the loan if the borrower defaults. In this way, a borrower with a poor credit history is able to take on longer term loans without having to be subjected to extortionate rates.
Effect on Credit Rating
One of the key advantages of taking out a guarantor loan is that the agreement effectively works to improve the credit rating of the borrower over time. As repayments are made on the guarantor loan, the borrower’s credit rating rises as a reflection of their ability to meet the conditions of a loan. The higher this rating rises, the more confident banks and other lending agencies will be to approve a future loan to the borrower. In this way, the guarantor loan system works to restore lender confidence, but has to rely on the existing strength of the guarantor’s credit, and their willingness to take on the risk of the borrower defaulting on their repayments.
In an ideal situation, a borrower will be able to use a guarantor loan to gradually rebuild their credit rating, without causing any financial penalties to their guarantor. A borrower with a high credit rating will then be able to potentially act as a guarantor to another person. However, it is important that the borrower maintains a good credit rating after the initial loan has been paid off. A borrower should also ensure that they don’t incur any extra debts during a guarantor loan, such as payday loans or as the result of taking out a credit card.
About the Author
UK based GBP Loans specialise in unsecured guarantor loans for tenants and homeowners alike. Applicants with a poor credit history can still apply as the loan is guaranteed by the chosen guarantor. Apply online with ease via the Fast Track Application form! Contact GBP Loans today for more information.