Lenders for guarantor loans are fairly easy to find and guarantor loans can be a great way of funding certain purchases if you are struggling to get approved for a traditional loan.
While it’s easier to get approved for a guarantor loan, there are other aspects that you should still take into account such as their higher interest rates.
Today, I’ll be discussing how guarantor loans work and whether it’s a good idea to opt for one or not.
What is a Guarantor Loan?
Simply put, a guarantor loan is a loan where someone close to you such as a family member or friend agrees to repay your loan if, at some point, you fail to make the repayments.
The person who agrees to this is known as the guarantor and they are responsible for any remaining debt that you’ll have if you end up being unable to afford the remaining repayments.
Guarantors can be assigned to all different sorts of loans such as car finance loans as well as mortgages.
Some landlords also require you to name a guarantor when you’re opting for a space to rent.
Guarantor loans are a type of consumer credit and they are normally aimed at individuals that either have a bad credit history or have no credit history at all.
As mentioned earlier, the interest rate for any guarantor loan you opt for will typically be quite high (as high as 50% per annum).
Since most guarantor loans typically last anywhere between 1 to 5 years, you may end paying more than the double the total amount of money that you borrowed.
This is why the high interest rate is definitely something to take into account when you’re considering a guarantor loan.
Any lender you go to for a guarantor loan will perform a credit check on you as well as your guarantor in order to ensure that they will be able to pay back any remaining debt in case you fail to do so.
Hence, your guarantor will be asked to prove that they are financially stable enough to make payments on your behalf. This could be by asking them to provide proof of their income, assets or savings.
In some cases, you can also secure the loan against one (or more) of your guarantor’s assets such as their property.
In certain cases, the loan money is transferred to the guarantor so that they can pass it onto you, the borrower.
If you start falling behind on your payments at any point, the lender will ask your guarantor to make the payment for you. They can also take the payment directly from your guarantor’s bank account using a Continuous Payment Authority (CPA).
If both of you are unable to make the payments, then the typical debt collection process would start.
This would involve the lender passing your debt onto a debt collection agency. If you fail to make payments to the debt collection agency, then a County Court Judgment (CCJ) could be taken out against you.
It’s important to note that the default on your loan will be mentioned in the credit files of both you as well as your guarantor. Thus, not only will your credit rating fall but your guarantor’s credit rating will fall as well.
As you can probably imagine, such a situation could put a lot of strain on your relationship with them and it could be the source of a lot of stress and financial turmoil.
What are some Advantages of Guarantor Loans?
The most obvious advantage of guarantor loans is that they are aimed at people with bad or non-existent credit scores.
If you can’t get approved among lenders who offer standard loans, you will most likely be able to get approved for a guarantor loan if you can produce a reliable guarantor with a good credit score.
One more great thing about them is that they are usually processed fairly quickly and you can have the loan amount in your bank account within a few days.
This allows you to utilise this amount for any emergency expenses or essential purchases you may have. You could also use this loan to consolidate existing debt.
They can also be a safe and useful way of improving your credit score.
Once you get your guarantor loan approved from a lender who is authorised and regulated by the Financial Conduct Authority (FCA) and you start making your regular payments, your credit score will start to improve.
Just be sure to make your payments to the lender on time and in full if you want your credit rating to keep rising.
A good credit record will allow you to get approved by traditional lenders in the future without needing to provide a guarantor.
Not to mention that you will also have access to lenders that provide more competitive interest rates as well as lenders that offer higher loan amounts.
Be sure to seek professional debt advice from an independent debt charity such as Payplan before you opt for any type of loan.
What are Some Disadvantages of Guarantor Loans?
I’ve already talked about how most guarantor loans have very high interest rates.
This is definitely something to think about because most loan repayments last between 1 to 5 years and with the interest rates that most lenders offer on guarantor loans, you’ll be paying more in interest than what the total loan amount is.
Another obvious disadvantage is the risk that a guarantor loan has for the guarantor. If you, as the borrower, fail to make your payments then the responsibility will fall on your guarantor.
Of course, them having to make payments for you will have a negative impact on their finances.
Not to mention that if, for some reason, your guarantor is unable to make the payments to the lender for you, then it will impact their credit rating and may even lead to court action and/or repossession of their assets.
As I’ve mentioned earlier, situations such as these could definitely lead to a deteriorating relationship between you and your guarantor.
Thus, when you approach a person to become a guarantor for your loan, make sure they completely understand what their responsibilities are.
It’s important to never force anyone to become your guarantor because not only will this put a strain on your relationship with them, but they could also complain to the lender and opt out of the agreement if they feel they’ve been coerced into it.
Loans with guarantors are a great way to provide people with bad credit access to loans that they can utilise to fund emergency expenditures or important purchases.
They definitely have much more dire consequences for failing to pay them back so it’s important that you assess your risks thoroughly before you enter into any sort of agreement.