If you have been turned down for a loan or other form of credit, then you are one of hundreds of thousands of people who are refused every year. While the financial crisis may have ended and interest rates remain stuck at record lows, the mainstream banks are still reluctant to lend to anybody except those with excellent or perfect credit ratings.
So millions have been shut out of the main credit market over the last few years, finding that they are not only unable to borrow the money they need to fund home improvements, new cars or debt consolidation but also not able to repair their credit records.
There may be a multitude of reasons for rejection – an applicant might have made some fairly minor mistakes with their finances in the past, he or she might not be registered to vote and so not on the electoral roll or they may have had a CCJ or default made against them up to six years ago.
This can be a cycle that is hard to break out of: an applicant needs to show a record of good repayments over time but is repeatedly turned down for a loan or credit card in order to build up such a history to begin with.
If you are new to the credit market – perhaps you have just bought your first home but don’t have sufficient funds to redecorate it or maybe you want to replace your car but have never borrowed money before – guarantor loans can help you.
With a guarantor loan, the applicant who has either a bad credit record or has never borrowed money before – finds somebody close to them who is prepared to stand as security that the loan will be repaid even if circumstances change.
How they can help rebuild credit:
- A clean sheet
Because it is the guarantor’s credit record that the lender is looking at, the borrower’s record is not so relevant when the lender makes its decision. The guarantor is providing the lender with the reassurance it needs that should the borrower fail or be unable to keep up with repayments, he or she will step in to ensure that the schedule is adhered to. That means that if you are worried you might be turned down for credit, you can apply for a guarantor loan more confident of success. This avoids the problem of having repeated credit searches on your record – something that the major financial institutions have come to recognise as a sign that a borrower might be in financial difficulty.
- Credit repair
While the lender will be looking at the guarantor’s credit record when making its decision, the repayments will be registered on the record of the borrower (so long as he or she sticks to the schedule). This means that while you may have a poor or non-existent record to start with, so long as you make all of your guarantor loan repayments on time, your credit record will start to improve almost immediately. Because borrowers look for a history of payments made on time when making lending decisions, this means that your record can go from poor to good quickly when you enter into a guarantor loan agreement.
- Safer for the borrower than other forms of credit
There are plenty of other forms of credit offered to the so-called sub prime market. These include payday loans, logbook loans and forms of doorstep lending. But all of these come with much higher interest rates than guarantor loans and often have other fees and admin charges. Some of these are also secured against property meaning that you could lose your home if you fail to keep up with repayments. With guarantor loans, the lender is taking the guarantor’s credit record into account when setting an interest rate meaning that a borrower can often benefit from a loan that is easier to manage.
- Longer repayment schedules
The longer your history of repaying loans on time is, then the more likely it is that you will be approved for other types of credit. Guarantor loans can help with this – they have longer repayment schedules than other forms of sub prime lending and larger capital sums on offer. If you take out a guarantor loan for, say, five years and always make your repayments on time, then this will reflect on your credit record throughout the life of the agreement. These longer repayment schedules also mean that a borrower can plan their finances more effectively for months, even years ahead. That gives them a better chance of keeping everything up to date and, as a result, continue to maintain their good record once things improve.
- They are looked on more favourably
Payday loans – while appropriate for short-term borrowing in some circumstances – have had a bad press. Not least has been the acknowledgement by the big banks that they will not touch applicants who have taken out a payday loan in the previous six months, sometimes 12. This is because some financial institutions regard payday loans as signs of financial distress and that those who have taken them out are less likely to adhere to other repayment schedules. There’s no such worry with guarantor loans which are recorded on your credit record just like other more traditional forms of credit. So long as you continue to make your repayments on time, then banks and other financial institutions will regard other applications for credit more favourably.
Article provided by Mike James, an independent content writer working together with technology-led finance broker Solution Loans.