The recent recession has affected almost everyone in one way or another. Some have been forced to take on extra hours at work while others have found themselves without a job at all. The recession has also prompted the banks to make a number of changes, one of the most significant surrounds their loans and more specifically; the lending criteria of their loans.
Prior to the recession, getting a loan via the bank wasn’t particularly tough, however once the recession hit – this all changed. The decrease in disposable income meant that many were unable to pay their loan; leaving banks struggling. This forced the banks to make significant changes to their lending criteria in a hope to reduce the amount of customers that fall into arrears on their loans.
What this means is that someone who would have previously been approved for a loan via their bank, are now being declined, forcing them to look elsewhere. This is where guarantor loans come in.
The basics of guarantor loans
Guarantor loans are a type of unsecured loan meaning they do not require the security of a home or any other physical asset. Instead, guarantor loan lenders will require the applicant to provide a friend or family member to support the application. It guarantor signs an agreement to say that they will make payment on behalf of the applicant if the applicant is ever unable to do so.
The guarantor must be a homeowner who has a good credit history and is receiving an income that is deemed sufficient to afford the repayments of the loan. The age criteria differs from lender to lender however generally the guarantor must be between the age 25 and 75. The majority of guarantor loan lenders will offer between £1000 and £5000 that is repayable over a term of 1 to 5 years.
The interest rates
Guarantor loans were first introduced to the UK unsecured loan market in a hope to bridge the gap between the low rate banks and mainstream lenders and the high interest doorstep lenders. The APR of guarantor loans is generally seen as quite high. Fundamentally, the rates reflect the risk of lending to those who may have missed payments and even defaulted on credit commitments in the past.
Some lenders will offer fixed interest rates, which means that your repayments will stay the same throughout the full loan term (providing you keep up with the repayments). Other lenders will offer variable rates, which means they are subject to change in accordance with the Bank of England Base Rate, however these changes are usually quite insignificant. Fixed interest rates are much easier to budget for as you always know exactly how much you’ll be paying each month.
Repaying the loan
Most lenders will set up a direct debit on completion of the loan application. This will mean your repayment amount will be automatically deducted from your bank account on a day of your choice. It is always a good idea to ensure your direct debit is set up on the day of, or very close to your payday – this means there should always be funds available.
If you’d like to settle the loan early then you are free to do so. Please note there may be an early settlement fee which is likely to be around 1 months worth of interest.
Where can I get a guarantor loan?
All guarantor loan lenders will have their own website on which you’ll be able to make an application. Having filled out the application form and sent in the relevant supporting documentation, the lender will carry out a variety of searches on both yourself and your guarantor. Lenders will look to communicate in various ways; over the phone, via email or even via text.
Some lenders may be willing to send an application in the post, however as it stands none offer an in-branch, face to face service such as the one offered by banks.
Getting into difficulty
If as the applicant you are struggling to make ends meet and don’t think you’ll have the funds available then the first thing you should do is get in contact with the lender to alert them of the situation. It is also a good idea to get in contact with your guarantor too, to make them aware they may be required to make a payment.
It is worth saying that you and your guarantor should be regularly in contact with each other regardless of the situation to ensure that your friendship is never in jeopardy.
With more and more people struggling to gain credit through mainstream sources such as their bank, building society or supermarket – the need for a product like guarantor loans will only continue to increase.