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Financial Planning

What is a guarantor loan?

A guarantor loan works similarly to any other loan, you borrow money from a lender and pay it back in instalments. However, a guarantor loan also requires a third party who “guarantees” they’ll pay off the debt if you cannot - typically a family member or friend. These loans are designed for people with a bad credit history who may not be eligible for standard loans. Lenders are more likely to offer a loan to borrowers with bad credit if a third party can guarantee the repayments should the original applicant default at any time. This reduces the risk to the lender, as the loan guarantor promises to pay back the loan back in case the borrower can’t.

How much do guarantor loans cost?

Since the lender is taking more risk by lending to a borrower with bad credit, interest rates are typically higher on guarantor loans than on regular personal loans. The interest rate charged will depend on your specific circumstances and can vary significantly – anywhere between about 25% and 70% APR. The interest rate depends on your lender and can fluctuate over time. You can usually borrow between $500 and $10,000 (sometimes more) for a period of between 12 months and five years – again, depending on the lender.

Benefits of loans with a guarantor

Guarantor loans are designed for those who are struggling to get approved for standard loans. The main advantage is that this allows those who have bad credit to borrow money. If you can afford to repay the loan and have a reliable guarantor with good credit, you’ll most likely be accepted for a guarantor loan. These loans can also be processed quickly and arrive in your account in a few days. So you can use these loans for emergency situations, essential purchases or to consolidate existing debt. This type of loan can also help you improve your credit score, which would allow you to apply for other loans and credit cards in the future with better rates.

Cons of using a guarantor

Guarantor loans generally have higher interest rates than normal personal loans, meaning the borrower will pay back significantly more than the original loan amount. There’s also a risk that if the guarantor isn’t able to make the payments and that their credit score could be impacted, which could in turn affect their ability to get credit in the future. In some cases, missed repayments can lead to court action or repossession of assets. In addition to the financial and credit score implications of failing to make a repayment on a guarantor loan, it’s worth mentioning that defaulting on a guarantor loan could also affect your relationship with your guarantor.

Credit cards

Finally, credit cards are another borrowing option for those with poor credit. If you already have several credit cards, pick the one with the lowest interest rate – some even offer 0% for a certain period of time. If you have bad credit, you could opt for credit building credit cards, which have more lenient eligibility requirements. However, as with most bad credit borrowing, the interest rate will likely be much higher than regular credit cards and credit limits will also be much lower. But if you use it responsibly, it can help to improve your credit score.