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This week, we’re taking an in-depth look at three big benefits of guarantor loans for young adults with a thin credit history.
As many cash-strapped students have found out the hard way, having no credit history — or, at least, a very thin credit history — can make borrowing money almost as difficult as having a poor credit history…
Hold on, what on earth is a thin credit history?
Sorry, we were getting ahead of ourselves there.
A thin credit history is — as the name suggests — when credit reference agencies don’t have very much information on your borrowing history.
Now, this could be because you’ve never had a credit card before or only ever borrowed money from your parents or you’ve always lived out of your savings…
Whatever the reason, credit reference agencies use your credit file — essentially, the history of whether you’ve borrowed and repaid money — to assess your credit profile. Having a thin credit file means that they don’t have enough information to make an accurate assessment of your creditworthiness and are unlikely to be confident enough to lend you money.
In other words, sometimes not borrowing — AKA the thing that seems like the “right” thing to do — can make it more difficult for you to borrow money. Isn’t that ironic?
So, what can you do if you have a thin credit history but need to borrow money?
If you don’t have a history of borrowing and repaying but need to borrow money, guarantor loans for young adults with a thin credit history can be a good option.
Of course, other options — like a credit card paid in full every month — might be available, but guarantor loans for young people with a thin credit history are a great way to get your foot on the borrowing ladder, build out your credit file and get more favourable rates and access to larger amounts of money (compared to credit cards), all at the same time.
In fact, there are three main advantages of guarantor loans for young people with a thin credit history:
1. It gives you access to rates and offers that other people with thin credit histories wouldn’t have
In many ways, a guarantor loan is a tailor-made solution for people with a thin credit history.
A guarantor loan, in a nutshell, is a personal loan that you get with the help of somebody else. That person — whoever it is — has to agree to cover your monthly repayments if you can’t pay.
Because they agree to do this, you become a much, much safer bet to the lender.
Even if you have a thin credit file, by having somebody guarantee your loan, the lender has a rock-solid guarantee they’re going to get their money back. As such, they’re far more likely to not only be happy to lend you money, but to offer you better deals on a personal loan than if you were to apply without a guarantor.
2. It helps you build your credit file
Another benefit of guarantor loans for young adults with a thin credit history is that each monthly repayment you make will help you build your credit score, bit by bit.
We know that taking out a loan to build your credit score sounds a bit backwards: shouldn’t not taking out a loan build your credit score?
Well, yes and no.
As you probably know by now, credit scores are a bit complicated.
While 30% of your credit score is based on how much debt you have, a larger percentage— 35% in fact, the biggest factor in deciding your credit score— is based on your repayment history, which is based on things like whether you have missed payments or defaulted on debt, etc…
In effect, when you have hardly any history of repaying debt, it’s very hard to build a healthy credit score.
That’s why guarantor loans for young adults with a thin credit history are a good idea: they help you rebuild your credit score, fill out your credit file and borrow money at a better rate than your thin credit report would usually get you.
3. It lets your family — or friends — help you get a leg up, without having to directly lend you money
One of the great benefits of guarantor loans for young adults with a thin credit history is that it lets the people you’re close to help you get on your financial feet without having to lend you money themselves.
That means that instead of dipping into their rainy-day fund or selling something important to them to help you out, your loved ones can agree to become a guarantor and help you borrow the money you need and build out your credit report.
Of course, the decision isn’t as simple as just signing a piece of paper — there are still credit and affordability checks to pass and the question of whether they’re willing to pay if you can’t — but if you’re thinking about borrowing money with a thin credit history, it’s worth talking to those you’re close to about whether they’d consider helping you out by being a guarantor.
Of course, if you’ve not got a history of borrowing and repaying money, then guarantor loans for young adults with a thin credit history aren’t the only option. But as this article shows, they are an option that’s well worth considering, especially if you need to borrow large sums of money.
- Author The Bamboo Team
- Posted 20 January 2020