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Which is Better a Payday Loan or Guarantor Loan?

If you have a poor credit score then the choice of lending that you have can be quite small. This is because many lenders are not willing to take a risk with someone with a low credit rating. Your main choices may be limited to lenders which do not take credit rating into consideration, such as payday and guarantor lenders. It is worth investigating other options though, a local credit union might be worth looking in to, for example. However, if you are comparing these two types of loans, it is worth understanding more about them.

About payday loans

A payday loan usually allows those with poor credit record to borrow up to £1,000. The amount that is offered will depend on how many loans the borrower has had in the past and if they have managed to repay them. So, if you have not had payday loan before then you may only be able to borrow a few hundred pounds. If you have had one form that lender before and repaid it on time, then they may be able to lend you more money.

A payday loan can be arranged very quickly, sometimes within a few hours, so is ideal if you need money in an emergency. You will have to repay it very quickly though. Repayment is set up to leave your account by direct debit when you get paid, hence the name. This means that you will not have the loan hanging around for too long. However, it does mean that you need to find the money to repay the loan all in one go which ca be tricky for some people. If you borrow a lot of money then it could be hard to find what you need to repay it and then if you do, it could be hard to manage for the rest of the month with that money gone. It is therefore really important to make sure that you check your finances and make sure that you will be able to repay the loan and that you will be able to manage once it is repaid.

About guarantor loans

A guarantor loan is also designed for those with a poor credit rating but it will tend to lend higher amounts usually in excess of £1,000.  They take a bit longer to arrange as well because your guarantor will have to have a credit check. You guarantor is someone that you nominate who will make any repayments that you are unable to. So, if you miss a repayment, they will be asked for the money instead. By having this back-up, it means that those with a poor credit rating are still able to take on loans for fairly high amounts of money.

With this type of loan, you will need to know someone that has a good credit rating and that is prepared to take on this responsibility for you. You will need them to understand that they will have to make repayments for you and even if you are really hopeful that you will be able to make the repayments yourself, there is a risk that they could end up repaying it all for you. You will also need to agree with them, as to what happens if they do make a repayment for you. They may just be happy to pay it or they may feel that you should repay them eventually. If this is the case then you will need to come up with a plan for that with them. It is wise to have this all in writing so that you both know what you agreed.

Which is best?

Choosing which is best will depend on your situation. If you do not need to borrow much, then it would be sensible to get a payday loan and then you will not need to borrow more than you need as this will be unnecessarily expensive. If you go for a guarantor loan though, you need to find someone that is willing to be your guarantor.

With all loans, it is also important to consider the cost and how easy you will find it to repay. Think about whether you feel the loan will offer you good value for money considering how much it will cost you. Think about what you are buying with it and if you think that is something that you really want or whether you can wait. Consider the total cost, including the loan cost and whether you would still buy that item if it was that price in the shops. Also, look at how much you have to repay and when. Consider whether you will have enough money to do this or if there is anything that you can do in order to make yourself some extra money so that you can afford it.

What to do When Interest Rates Fall

When interest rates rise, people may worry that their loans will get more expensive and maybe even panic. However, when the rates fall people tend to do very little. It is worth though, reacting in a similar way that you would when rates go up as you need to take advantages of any changes that are taking place.

Compare loans and consider switching

If you have a loan then you may find that when the Bank of England base rate falls it will not necessarily mean that your rate goes down. If you are in a fixed rate then this will not happen, but even if you have a variable rate, unless it is a tracker, then the rate may not necessarily go down. Some lenders do not always choose to follow the changes in base rate or they may be slow to follow it. This is because they make more money if they keep the rate higher and if other lenders do not put their rates down, they will not need to copy as they will still be competitive. However, it could be that some lenders reduce their rates and others do not. It is therefore a good idea to do some research and see whether you can switch to a lender which has a lower rate and therefore save money.

Before you switch you do need to be careful though. You need to check whether there will be any costs. It may be that you will have to pay a fee to leave your current lender and you may also have to pay a fee to join a new one. Check this and then calculate whether it is still worth switching to them or not. You could find that you will be able to save quite a bit of money. If you are in a fixed rate deal it may be more difficult for you to switch as you are often tied in to that lender.

Pay off extra

When interest rates fall, if you are on a variable interest rate, it means that you will normally be paying less back. This could be a significant chunk of money that you are saving or it could be a small amount, depending on how high the interest rate is and how much money you are paying interest on. In both cases you will be spending less. This can therefore be a good opportunity to repay a bit extra on your loan.

Before you do this, you need to check whether there is any penalty for repaying the loan early. Some will have a fee that you have to pay in order to repay early which is called an early redemption fee. This could be equivalent to a month’s interest or it could be a significantly larger amount. It is well worth checking to see. There may not be a fee at all, but you may find that you will have to pay quite a bit. The easiest way to find out is by contacting customer services and asking. Then you will be able to calculate whether you think it is worth overpaying. If it is too expensive, then it can be wise to use the money that you save to repay other loans or to put into a savings account to use in an emergency.

Save some money

It is a good idea saving money at any time. When interest rates are low or if they are falling then you may not feel that it is so worthwhile. This is because the interest that you get on your savings is very low. It can feel that you are not getting much of a return for your money. In fact, you may feel that you will be better off spending it because the interest rate is so low and possibly even lower than inflation. In theory, it is therefore better to spend the money as otherwise it will lose value. However, having some money to fall back on can be far better than having to borrow money in the future and you will save money if you do not have to do this.

You may also be able to find some decent savings rates if you search for them. If you are prepared to tie up your money, perhaps in a notice account of a bond, then this could help you get more interest. However, if you are saving for an emergency then you may be looking for an instant access account. Compare different accounts though and you could find one that offers a decent rate that you feel is worth taking.

So, it can be tempting not to do anything hen interest rates fall apart form being glad that they did not rise and hoping you will benefit. However, it is wise to actually do a few things to make sure that you really can take advantage in the rate reduction.