Opening a loan is a risky financial decision that requires not only the right degree of financial intelligence and knowledge, but also a well-thought out reasoning to why a loan would be beneficial for your specific case. Why is this so important?
Consider this: millions of people around the world are opening loans because they think they need to open one; however, years down the road, they regret opening it in the first place. With that being said, before you are quick to jump on the Guarantor Loan train, we are going to share some insight as to when you should consider opening and not opening a guarantor loan. In this article, you will find great tips and advice that should help make your decision that much easier.
What are Guarantor Loans?
Before we jump into when to use and not use a guarantor loan, it may prove beneficial to explore some of the basics of the loan. A guarantor loan is simply a loan where an individual uses a guarantor to help secure a lending company that they are trustworthy and creditworthy. Some people may refer to a guarantor as a co-signer.
As we have discussed in previous articles, a guarantor may be considered a family member, a friend, or even a spouse. In any case, these individuals are known to have great credit scores and are financially educated. Now, there are a few other pertinent pieces of information regarding guarantor loans. These loans are known to offer some of the highest interest rates in the entire industry.
With that being said, it’s important to make sure that this loan is best for you before opening. Otherwise, a guarantor loan can guarantee you years upon years of debt and high interest rate charges. Now, if handled properly and paid monthly, a guarantor loan can completely transform an individual’s credit report and credit score, which is the greatest financial benefit of all.
When to use a Guarantor Loan?
When it comes to the purpose and intention behind guarantor loans, we are looking are specific uses and emergency purposes. Guarantor loans are not meant for individuals that are seeking to purchase clothes, go Christmas shopping, or purchase a new car. In fact, there are a few specific uses that a guarantor loan is beneficial for:
- Paying rent or mortgage
- Emergency Repairs
- Medical emergencies
- Pet emergencies
As you can tell, these situations are all considered financial emergencies, where extra capital can be of assistance. Considering the costs of rent and mortgages in the United Kingdom, an individual cannot risk being late on any of these types of payments; otherwise, their monthly bill might skyrocket. Moreover, the same can be true for that of repairs. If an individual does not take care of emergency repairs in their home or car, it can lead to detrimental situations.
Given the rising cost of living in the United Kingdom, emergency costs are rising as well, and a guarantor loan is an individual’s best tool to help cover these costs. Now, keep in mind, depending on the length of time required to pay-off the loan, the longer it remains open, the more interest that will accrue. This is where it can get tricky and why it’s critical to consider the length of the guarantor loan prior to opening it.
Benefits of Using a Guarantor Loan
When an individual picks a guarantor loan and it’s the right case and scenario, the borrower can benefit immensely. Here are a few benefits that you can anticipate:
- Security in emergency situations.
- Adds to credit history and mix.
- Boosts credit score.
When to NOT Use a Guarantor Loan?
Since guarantor loans are considered carrying some of the highest interest rates on the loan market, opening a guarantor loan for anything less than emergency is pointless and a poor financial decision. Consider this, according to MoneySavingExpert.com, the interest rate is 49.9% higher than a typical credit card. So, if you are late or happen to only pay the minimum payment, you can anticipate extremely high charge, on top of potential default fees or late fees. With this in mind, the following are situations where guarantor loans should be avoided at all costs:
- Spontaneous Shopping Trips
- Christmas Shopping
- Birthday Shopping
- Clothes Shopping
- Brand-new cars
- Instant-gratification purposes
- Consolidation purposes
As you can tell, these are all situations that perhaps a zero-interest credit card or APR 0% credit card may prove to be more beneficial. If you need more proof, think about it this way: you will be paying more for those Christmas gifts if you choose to use a guarantor loan in interest than you will for the physical gifts. Guarantor loans should only be opened for emergency purposes only.
Consequences of Using a Guarantor Loan
When an individual is not aware and opens a guarantor loan, it can prove to be counterproductive and open a door to many consequences. Here are a few downsides that come with using a guarantor loan:
- Extremely high interests, which can significantly extend the life expectancy of the loan.
- High charges for late fees and defaults, which can debilitate and individual’s personal finances and ability to pay on time.
Knowing When to Apply and Not to Apply
Guarantor loans can be extremely beneficial for an individual’s credit score, if used properly. As we have discussed in this article, guarantor loans are optimal for emergency situations, not everyday spending. This can be attributed to the overwhelmingly high interest rates and charges, all of which directly impacts the cost and longevity of a loan.
With that being said, it’s vital to understand and know when to apply for a guarantor loan and when it’s not meant for you. If you are looking for spontaneous and everyday spending, a credit card would prove more effective, and cheaper for this matter. However, if you are in an emergency, suffer from poor credit, and need to improve your credit score, there is no better loan than a guarantor loan.