A bad credit score is downright challenging for businesses and individuals alike. Plus, newbies with almost zero credit rating cannot acquire loans with ease.
Such scenarios leave you wondering how loans like guarantor loans affect your credit. Do they help improve your rating or degrade it further?
Though you can grab this loan irrespective of your credit history, it can positively or negatively affect your credit. The outcome greatly depends on your payment behaviour of the monthly instalments.
So, how does a guarantor loan affect your credit, exactly? Who can avail of these loans, and who is ineligible for the same? Read through this piece and find out instantly!
Can A Guarantor Loan Improve Credit Rating?
Yes, a guarantor loan can help fix your credit rating, given you follow a few conditions. Like any other type of loan, your score will go northward if you pay your debts in time. Do not leave any monthly instalment pending, and you will see the positive effect it has on your rating.
The same goes for guarantor loans. Moreover, if you abide by the rules, you can build a great portfolio to apply for bigger bank loans in the future. It will also let you opt for the higher forms of credits in the time to come.
That being said, the loans can also have adverse effects on your credit rating. This can occur if you do not make timely payments, or worse, fail to pay an instalment leaving your guarantor to pay the same.
Both these situations will significantly reduce your credibility and, consequently, your credit score.
If that is the case, why opt for a guarantor loan and how does it work?
What Are Guarantor Loans and How Do They Work?
A guarantor loan is an unsecured personal loan that you can get even if you have a low credit score. For these loans, you will need a third party (other than the bank and yourself) to act as a guarantor.
They should be an individual with a high credit score who will be liable to pay your debt amount if you cannot fulfil it. Therefore, a guarantor is like your back up for the debt payment, confirmed by the banks or other lending parties.
To understand the loan better, have a quick look at its pros and cons!
- An individual with a low credit score can avail
- Available for individuals with a bad credit history
- An excellent option for newcomers
- Easily accessible if you have a guarantor
- High risk and interest rates
- This leads to a lower credit score in case of failure of payment
- Requires a reliable guarantor
Who Are Guarantor Loans For?
As mentioned above, guarantor loans are primarily for those who cannot get a standard loan. Other banks may not offer you a loan at all or only at a very high-interest rate.
That is when guarantor loans step in! When a bank or financial institution offers these unsecured loans, they need a reliable source as a precaution. Thus, if you do not repay your instalments, the institutions will turn towards your guarantors for the same.
Here are a few instances where a guarantor loan is an excellent idea for you:
- If you are applying for a loan for the first time and have zero credit score
- You have a low credit rating due to the inability to pay prior instalments in time
- Defaulting on loans
- You have taken multiple loans simultaneously, affecting your ability to repay
- If you spend more than 45% – 50% of your assigned credit card limit
Who Cannot Get A Guarantor Loan?
Can I get a guarantor loan? This question may surely have hit your mind at least once. You can enjoy a guarantor loan given you get a reliable person with a good credit score in most cases.
Despite its ease of access, there can be some cases where you may not be eligible for this loan.
- Currently bankrupt
- Have been bankrupt within the last three years
- In a Debt Management Plan, or were in the last year
- Part of an Individual Voluntary Agreement, or were in the previous year
- Have an active Trust Deed or one in the last year
Note that every financial lender may not have all these parameters.
Choosing the Right Guarantor Loan Provider
Now that you know why a guarantor loan is the right choice, you may wonder how to get one.
First of all, you must know that most banks do not offer these types of loans. Even if they do, the interest on the loan is usually too high – an APR of almost 70%. However, a few banks and special financial agencies offer excellent rates on guarantor loans.
That being said, you still need to be cautious while choosing a lender and applying for a guarantor loan. You must thoroughly consider and compare details like interest rate, duration, whether you comply with their rules, requirements for guarantor, etc.
You can further confirm the provider’s credibility by viewing the customer reviews, checking on consumer forums, and checking its registration details.
So, how much will a guarantor loan affect your credit? It totally depends on your payment behaviour. If you make all the instalments on or before the due date, you are sure to see a positive rise in your credit score. However, it may have adverse effects otherwise. Now that you are well adept with the effect of guarantor loans on your credit, you can easily make the right choice!