Have you ever heard of a guaranteed loans? Please don’t think it is a loan that you guaranteed to get, huh! You will only get the loan if you meet the set requirements.
If you are wondering what a guaranteed loan is, how it works and its pros and cons, read more to find out.
Guaranteed Loan: What Is It?
This is a loan backed by another party. This means a third party who can be your friend, a firm or a federal association will be eligible to pay the loan if you default.
How Does a Guaranteed Loan Work?
A guaranteed loan may apply if a borrower has a low credit score making him/her ineligible to access it. A borrower required to look for someone he trusts which could also a firm or a federal organization and use them as security. This will reduce the risks of default.
Guaranteed loans can access from physical banks, online lending institutions, and credit unions.
Types of Guaranteed Loans
Understanding the different types of guaranteed loans will make it easier to evaluate your options and decide on the best choice. These types include:
#1 Guaranteed Home Loans
What’s a guaranteed home loan? It’s simply a guaranteed mortgage.
OK, so what’s a guaranteed mortgage? A guaranteed mortgage backed by a third party. The third party in most cases is the Department of Veterans Affairs (VA) or the Federal Housing Administration (FHA).
Who can apply for guaranteed home loans?
Borrowers who want to buy their homes but have low credit scores can be eligible for this type of loan. This is because they considered risky. The lenders, therefore, need to be reassured of loan repayment in time.
People who have inadequate down payments can also apply to this loan type. The Federal Housing Administration however requires the borrowers to have mortgage insurance which will cater for default payments.
Pros of a Guaranteed Home Loan
- Makes a mortgage loan accessible
A guaranteed home loan makes it easy for homebuyers with a low credit score or inadequate down payment to get hold of a property.
- Can get loans of higher amounts
The guarantor’s income plays a huge role in the amount of loan you’ll get. A higher guarantor’s income leads to a higher loan limit.
- Lets more people own their property
People with low income can buy a home or a business property using this loan.
- The interest rates are relatively lower
Since the loan secured, the interest will be lower.
Cons of a Guaranteed Home Loan
- The guarantor will pay the loan in case you default
The guarantor acts as security, hence will be eligible to pay back the loan in case of missed payments or defaults.
- It could put a strain on the relationship you had with the third party
Put yourself in your guarantor’s shoes. Imagine paying for the loan that your trusted friend supposed to pay. How would you feel? Bad, right?
Yeah, that is how your guarantor will feel if you break your promise. It is not a good thing.
#2 Payday Loans
This is a short-term unsecured online loan that is paid back in your next paycheck. That means you have about a month to get the loan paid.
Who can apply for a payday loan?
Everyone is eligible to apply for the loan as long as you meet the set requirements. According to the Government of Canada, The Canadian Payday Loan Association reports that nearly 2 million Canadians use payday loans each year. That shows that instant loans for Canadians are easily accessible.
You should however use the loan for what you need since the interests are not that friendly.
Pros of Using Payday Loans
- Have a quick and easy application process
The application process done online hence the process completed within minutes and a response given. The loan can be issued the same day you applied for it.
- Operate 24/7
Whether your emergency occurs at night or daytime, you can bill it with a payday loan.
- Lenders are regulated by the state
Payday loans have been known to have very high interests. To solve this, many US states have regulated their interests to avoid consumer exploitation.
Cons of Using Payday Loan
- High interests
Even though payday loan lenders regulated by the states, their interests are still high. For every $100 you borrow you can pay an interest of between $20 and $30. This sums up to an APR of over 400% annually.
- Additional fees
If you fail to repay the loan in time you may charge with penalties which increases the borrowing costs.
#3 Student Loans
These are loans taken by students for college and university expenses. They backed by the federal government.
Who can apply?
Any student who wants to pursue college studies can apply. He/she will require to complete a free application and submit it for processing in each academic year.
Research shows that there are more than 1.7 million student borrowers in Canada. And the average total student debt is over $18 billion.
Pros of Taking Student Loans
- No credit checks
Your credit score doesn’t matter during student loan applications.
- Lets students study in the college of their dreams
Students who cannot afford to pay for college expenses can do so using student loans.
- Low-interest loans
The interest loans are low since the federal government guarantees the loans using tax.
- The interests are fixed
Fixed interests make it easier for the borrowers to calculate the amount needed per installment.
Cons of Taking Student Loans
- Can hurt your credit score
Loan default will lower your score making it difficult to access favorable-term loans.
- This leads to early debts
After college studies, you’ll be required to start the repayment process. This means starting life with debts.
Why Guaranteed Loans So Popular?
Guaranteed loans have become so popular due to the following reasons:
- They let you borrow money even with a bad credit score.
- Payday loans regulated by the states hence protecting consumers’ interests.
- Guaranteed loans like student loans and payday loans are easy to access.
- Student loans have low interest since the loans guaranteed by the country’s tax.
- It’s possible to obtain higher mortgage loan limits depending on the guarantor’s income level.
If you want to get a guaranteed loan it’s important to do a little bit of research to make informed decisions.