It can be difficult to get accepted for car finance if you have a poor credit history or in the case of young drivers, no credit history at all.
This is where guarantor car finance comes in. It would involve someone close to you signing up as a guarantor for your application.
They would have to make payments towards your care finance on your behalf if you start failing to make the payments.
Today, I’ll be talking about how you can find a guarantor on car finance as well as give you some advice on how to get approved for such a loan.
What is Guarantor Car Finance and How does it Work?
As I mentioned earlier, it can be difficult for you to secure a traditional car finance loan for a number of reasons.
This could happen if you have a bad credit score and it can also happen if your credit score doesn’t exist (in the case of young adults).
In any of these cases, opting for a guarantor car finance loan can be a great option as your chances of getting approved for such a loan will be much higher.
It’s important that the guarantor you choose has a good credit history. If the guarantor has a bad credit score and financial problems of their own, the lender will not accept them as a guarantor for your car finance loan.
Guarantors act as a safety net for lenders in case the borrower starts failing to make payments towards the car finance loan.
If the borrower fails to make the monthly repayments, then the guarantor has to step in and make the payments on behalf of the borrower.
In most cases, guarantors typically don’t have to do anything once they sign the agreement as long as the borrower is making his/her monthly repayments on time.
When looking for lenders, always be sure to deal with lenders that are authorised and regulated by the Financial Conduct Authority (FCA).
Is Car Finance With a Guarantor a Good Idea for Young Drivers?
If you’re a young adult looking to purchase a car and have little to no history of borrowing money or repaying debt, then it’s quite common to use a guarantor to finance your first car.
Typically, a parent or some other family member with a decent credit rating acts as the guarantor for most car loans that young adults opt for.
Getting an incredibly cheap car with cash may not be the best choice since they’re usually unreliable and break down very often. You’ll be paying a lot of unexpected maintenance bills if you opt for a cheap, used car.
Instead, buying a new car with a guarantor for car finance will ensure that you buy a vehicle that is reliable and won’t break down on you.
Not only that but such a loan will give you the chance to start building your credit rating.
Your credit rating will start to build and improve once you start making repayments towards the loan. Just be sure to make your monthly repayments on time and in full.
If you start missing monthly repayments, these will show up in your credit file and severely negatively impact your credit rating.
Thus, you’ll be killing two birds with one stone: funding your car purchase and building your credit rating.
With a healthy credit score, you won’t be needing a guarantor in the future for whatever loan you may apply for.
What are the Different Types of Car Finance?
There are mainly two types of car finance agreements that are available if you use a guarantor. These are Personal Contract Purchase (PCP) and Hire Purchase (HP).
Personal Contract Purchase (PCP)
Personal Contract Purchase agreements are an affordable and prudent way of utilising a new or even a used car for your needs.
While a PCP does help you get a car, unlike normal loans, you will not be paying off the full value of the car and as a result, at the end of your agreement, you won’t own the car (unless you opt to pay the optional final balloon payment).
The agreement starts off with an initial deposit. This deposit is typically around 10% of what the car’s value is. Of course, the larger your initial deposit is, the less you’ll have to borrow and the lower your monthly payments will be.
The amount of money you’ll borrow afterwards to finance the car is based on how much the lender predicts the car’s value will depreciate over the term of the agreement minus the initial deposit you’ve submitted.
You will be paying off this amount over the course of the agreement (which typically lasts 24 to 36 months) plus interest.
The interest rates for these types of agreements are typically around 4%.
If you and/or your guarantor have decent credit scores, then you could get offered lower interest rates.
At the end of the agreement, you will be presented with the final balloon payment. This is a large final payment that you’ll have to pay if you want to own the car outright.
Keep in mind that this final payment is optional and as an alternative, you can opt to give the car back.
This payment is also known as the Guaranteed Future Value (GFV) and is how much the lender expects your car’s value to be at the end of your agreement.
Hire Purchase (HP)
Hire Purchase agreements are much more straightforward than Personal Contract Purchase agreements.
They are a manageable way to fund a new or used car. Just like with PCP agreements, you start off by paying an initial deposit which is usually about 10% of the car’s value.
After that, you pay off the value of the car in monthly instalments towards the loan that you took out which was secured against the car.
Unlike PCP agreements, once you’ve made the final repayment in the form of a monthly instalment, you now own the car outright.
The great thing about hire purchase agreements is that it’s a car loan that you can get approved for even with bad credit history.
Of course, it’s important that the guarantor you provide for the loan has a fairly good credit history, however.
Another great thing about hire purchase agreements with a guarantor is that they don’t usually have mileage restrictions whereas PCP agreements do.
That being said, the monthly repayments in HP agreements are typically higher than that in PCP agreements.
Your guarantor will typically not have to do anything once they sign the application with you, provided that you keep up with your repayments towards the car loan.
It’s also important to note that lenders can repossess your car without a court order in an HP agreement until you’ve paid off at least a third of the total payable amount.
Getting a car loan with a guarantor is fairly common and a smart way of going about it if you have a bad or non-existent credit score.
A guarantor with a respectable credit score can help you get approved by lenders that offer competitive interest rates as well as other benefits.