Guarantor loans can be the cheapest type of loan if you have bad credit

November 18, 2016

When looking for a loan the first question must be; can I borrow from a mainstream lender (bank, building society or Hire Purchase specialist) at low, headline, rates of interest? If the answer is yes, then you don’t need alternative loan providers at all; they will be more expensive and you should approach your bank or building society.

Can I still get a loan even if I have a bad credit history or no credit record?

If, however, you have a poor or bad credit history or maybe you are young and have no credit record, then this route may simply not be available to you and you won’t be able to borrow from a bank. But you still want a loan for a purchase that will improve your life; a car, a wedding, a new smart TV or maybe to start a business?

The next step is to consider carefully where you might borrow those needed funds, your ability to make the repayments (affordability) and how spreading the loan over a period of smaller fixed payments might help your personal circumstances and help build or repair your credit history.

And then look at the real costs of borrowing, particularly any hidden fees or charges. APR is a good way to compare differing loans but may not always reflect hidden fees and costs. So where to go?

Payday loans

Payday loans (now called Short Term High Cost Credit); Typical sum borrowed £100 to £500. APR typically above 1,200 %. Loan for 1 or 2 months, but similar styled products can be longer, up to 6 months or more. Big drawback is you have to repay 100% of loan and interest in one go.

Pawn Broking

Pawnbroking; any amount can be borrowed, subject to jewelry or similar valuable assets being used as security. APR typically 96 %. Loans only last 6 months but can be extended. The problem is if you don’t have any valuable jewelry or goods to ‘pledge’.

Rent to own

Rent to own; generally a way to buy white goods and some brown goods on credit, eg fridges, TVs and some furniture items. The APR is typically 70 % but the goods and associated service/insurance agreements can make the goods more expensive to comparable goods on sale at the time of purchase. So you pay twice. Drawback is the overall cost and that the goods can be removed if you miss payments.

Logbook loans

Logbook loans. Does what is says on the tin. You get a loan effectively secured against your car (usually at pretty high interest rates and with the lender taking the V5) APR typically over 400% miss a payment or two and lose your car?

Guarantor loans

Guarantor loans. You can borrow small sums, from £500 up to larger amounts £10,000 or more, over longer periods, which makes for smaller, affordable, repayments. Also, good for consolidating other high cost loans even when you have a bad credit history. APR typically 30-50% (take advice on loan consolidation and only consider a guarantor loan where the overall interest charge is lower)

So, the only obvious downside to a Guarantor loan is that you need a Guarantor. Financially it makes sense to consider this option even where you may have to explain to a good friend or family member why you need the loan and why you need them to support you. It can also help you rebuild a poor credit rating, so if you need a loan, this may be your best and cheapest alternative.

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