When an emergency strikes and you need money fast, many people turn to short term loans to cover the bill they need to payand they spread their repayments into manageable instalments. But when you have poor credit and no one to support your application as a guarantor, things can be a little more complicated.
In this article the Loan Broker team look at bad credit loans and why guarantors aren’t all they’re cracked up to be.
What is a bad credit loan?
A bad credit loan is a type of loan that is especially designed for those with poor credit histories. It could be that you’ve simply never taken out credit before or it could be that you have had difficulty repaying a loan in the past. Both of these things negatively impact on your credit rating and this makes it harder for you to access finance.
If you’re in this position, it is often much easier to get a bad credit loan. When managed responsibly, bad credit loans are often a good starting point for people trying to build or rebuild their credit history when they struggle to be accepted for other types of credit.
They tend to come with higher interest rates and greater restrictions than other types of loan. The reason for this is that it balances out the risk to the lender that they may not get their money back.
What is a guarantor loan?
Guarantor loans are also a common option for those with poor credit ratings.
The risk to the lender for advancing money to someone with bad credit is, understandably, much higher. Bad credit suggests to lenders that you have difficulty or little experiencing in managing credit and therefore these loans also tend to have higher interest rates and more restrictions.
However these loans still tend to have more attractive terms and conditions than bad credit loans alone. That’s because they involve signing up a guarantor to support your application; minimising this risk to the lender.
Should you default on your loan repayments your guarantor, who could be a homeowner friend or family member with good credit, will be responsible for making the payment on your behalf. This assures the lender they’re more likely to get the money they’re owed if you default.
Bad credit loans versus no guarantor loans
Both guarantor loans and bad credit loans are available to those with poor credit. While guarantor loans require asking someone to pay back your loan if you are unable to, bad credit loans do not.
It can often be difficult to find someone to be a willing candidate to be your guarantor and, even if they do agree, it can put a serious strain on the relationship once money is involved. On the other hand, bad credit loans give you access to the finance you need without needing a friend or family member to take responsibility for your debt.
Advantages of a bad credit loan with no guarantor
Of course, the main benefit of your bad credit loan will be that you are able to access credit despite not having a pristine credit history. The lack of a guarantor also means you can secure your loan without needing to ask a friend to potentially pay the loan back for you.
On top of this, a bad credit loan without a guarantor can also help you to both build or rebuild your credit rating by proving you are able to manage credit responsibly through your monthly repayments
Access to small amount of money?
You can generally borrow between £100 and £5,000 with a bad credit loan without the need for a guarantor, but this will depend on the lender you choose.
As each loan provider will have their own eligibility criteria and terms for borrowers with poor credit histories, it is always wise to shop around for the best possible price for your loan using a certified broker service like Loan Broker.
Great for emergencies
What would you do if your car broke down tomorrow and you didn’t have the money on hand to get it fixed? Would you be able to get to work? Or take the kids to school? That’s when a bad credit short term loan would come in handy.
They give you access to the money you need in an emergency right away and they offer the option to spread the cost into manageable monthly repayments. People usually take out bad credit loans to pay for unexpected expenses like:
- Urgent bills,
- Car repairs,
- Funeral expenses,
- Medical or dental treatment,
- Vital home improvements like broken boilers and burst pipes, or
- When their employer is unable to pay their wages.
Since there is no guarantor to check alongside your own application, these loans are also generally much faster. In some cases, your lender could have the money in your account within minutes of approving your application.
Financial Conduct Authority protection
All reputable lenders in the UK must be authorised and regulated by the Financial Conduct Authority (FCA). The FCA are responsible for setting and enforcing rules that protect you as a borrower.
The three main guidelines that bad credit lenders are required to follow include:
- The amount of interest charged can never be any higher than 0.8% per day,
- If you default on a payment, they cannot charge more than £15 in fees and they can’t penalise you by increasing the interest rate you pay, and
- The total in interest and any fees you accrue will never come to any more than the total value of the original loan. So, if you were to take out a loan of £150, the most you will ever be made to pay back will be £300 in total.
Bad credit loans with no guarantor are unsecured
Bad credit loans with no guarantor are almost always unsecured. When a loan is unsecured, it means you don’t need to put anything up as collateral in order to receive the money.
Secured loans carry the risk that, should you default on your payments, your lender can repossess your home or car to cover the remainder of the loan making unsecured bad credit loans considerably less risky than secured credit.
Why it’s better not to use a guarantor on a loan
Wherever possible, you should try to get a bad credit loan that does not ask for a guarantor. One of the main reasons for this is that guarantor loans tend to be much more expensive compared to similar sized loans from banks and building societies .
Guarantor loans also receive a lot of bad press since they do not offer the same level of consumer protection as that of payday loans or short-term loans. The Financial Conduct Authority is actually already investigating a number of guarantor loan providers because of worries about the level of interest charged, the very high default fees, and poor customer service reported by customers.
There are also other considerations you should consider before asking someone to be your guarantor on a loan. Your chosen guarantor must go through all the same checks as you do during your application and so must have a very good credit rating in order for you to be accepted.
If you then miss a payment, your lender would then chase your guarantor for the money you owe. Your relationship with your guarantor, who may be a family member or close friend, could suffer greatly as a result of this.
Should your guarantor also be unable to settle the debt, you may both be taken to court by the loan provider. This could end in either a statutory demand (a bankruptcy petition) or a County Court Judgement; resulting in a great deal of difficulty for you both should either of you want to apply for credit in the future.
Get the cheapest no guarantor bad credit loan from licensed lenders with LoanBroker
Here at Loan Broker, we’re not lenders. We are a team of highly experienced loan brokers which means we can help you find the best possible price and terms for your no guarantor bad credit loan.
Our close relationship with all our lending partners means we can send your application to those we believe are most likely to accept you for credit. We work with many of the top bad credit lenders in the country, so you know you’ll get some of the best deals on the market.
We’re here to save you the time and hassle of looking for a lender willing to accept you with a poor credit history. Start your loan application with LoanBroker today.