If you have bad credit or if it’s your first time to borrow, you’ll find a guarantor loan is much cheaper and more flexible than other forms of borrowing.
Guarantor loans are often linked with people who have bad credit or those who haven’t established credit yet, such as young people just starting out in their first job or new graduates just getting on board with their career.
There are many reasons why young people may need such financial help. This may include getting a new car or house or pay for college. The fact they cannot get a loan themselves does not mean that they are not financially responsible or able to pay back the loan.
There are also people, who are high earners with sensible financial habits, and can afford the repayments, but do not have the credit history to reassure the lender about the level of risk.
Banks and other traditional mainstream lenders usually turn those with poor or bad credit and no previous credit down. Mainstream lending criteria are often automatic and do not come with a personal review of the applicant’s financial circumstances. Thus, a guarantor loan is sometimes the only way a young adult in their first job can secure a loan.
If this interests you, then it pays off to be familiar with guarantor loans before you take out one. Read on to learn more about guarantor loans.
How does a guarantor loan work?
Guarantor loans work the same way as an unsecured personal loan, but you get to have a close friend or family member to co-sign your loan, promising to be responsible for paying back your loan if you fail to make the repayments.
With a guarantor loan, you can borrow anything between £500 and £15,000, which you can repay over periods of between one and five years, depending on your ability to repay the loan amount.
You can use a guarantor loan for just about any personal expense. This type of loan is most common in the mortgage industry, especially for young people without a prior credit history. Angel investors sometimes use these loans to help start-up companies as well, where the investor is unwilling or unable to provide direct funding.
Majority of people turn to guarantor loans because of the strict lending criteria, which states that anyone with no credit history or poor credit history either cannot secure a bank loan at all or will only be able to secure one at a high rate of interest.
Guarantor Criteria and Responsibilities
The guarantor must be at least 18 years old, but some lenders require them to be over 21. The guarantor is often a close family member, perhaps a parent or a trusted friend or co-worker, who has a better credit history than the borrower does.
Sometimes a guarantor can be a spouse or a partner as long as he or she is not financially linked to the borrower. It is not possible to become a guarantor on behalf of anyone who you hold any joint bank accounts with or a housemate who you hold a bills account.
The guarantor must have a good credit rating. He or she will be credit checked prior to any application being completed. The guarantor must be someone in full-time employment and will need to prove that he or she can afford and make the repayments if in case the applicant default at any point through the credit agreement.
Guarantor loans carry a risk for the person agreeing to act as guarantor. It is important that the guarantor understands the risk involved and will have to agree to the terms and conditions of the loan.
Pros and Cons of Guarantor Loans
Everything has its advantages and disadvantages, and guarantor loans are not exempted from this.
One advantage of this type of loan is its lower interest rate as compared to other bad credit quick loans. Because a guarantor with good credit score supports the loan, you will be offered a lower rate of interest.
Another benefit of a guarantor loan is its flexible repayment terms with the option of shortening or extending your contract. Most guarantor loans also offer an early settlement option. If you wish to pay your loan off early, you can do so with a guarantor loan at no extra fee.
Larger borrowing amount with the benefit of borrowing more when you need to is also possible for guarantor loans. This is because the risk is lowered due to the help of a guarantor. This loan allows a higher amount of money to be borrowed.
The guarantor has to pay off the debt if the borrower defaults or fail to keep up with the repayments, and yet the guarantor does not even get a drop of that money he or she pays for. If the borrower misses a payment, the lender will contact the guarantor and request payment from them.
Any default or missed payments can affect the guarantor’s and the borrower’s credit score negatively. So, it’s not only the borrower’s credit score will be affected, but also the guarantor’s.
There is a huge possibility of a broken relationship or friendship of the guarantor and borrower in the face of monetary issues. The two may have misunderstandings later in case of a default. The relationship may be compromised if ever there will be problems with the repayment of the debt.
It would be wise to think it through before asking someone to be your guarantor or agreeing to be someone’s guarantor. Keep in mind that the borrower-guarantor relationship is a fragile one.
The best guarantor loan means it is the cheapest to pay back. Search and compare the rates of the lenders offering guarantor loans.
The cost of paying back your guarantor loan depends upon how much you will loan, the interest rate, and how long your payback period is.
Note also that a shorter term costs less because you pay less interest overall. The longer your loan term is, the higher the amount you will be paying, as the interest will increase too.
You can consider loans with a guarantor if you’ve been refused credit from other lenders due to bad credit or no credit at all.
Through a guarantor loan, you can improve your credit rating or start to build a good one, so long as you keep up with the payments on time. A guarantor loan is a good alternative for a more costly payday loan.
Indeed, a guarantor loan can help you borrow money if you’re having trouble getting an unsecured loan, but you should only borrow what you can afford to pay back.
Being a guarantor, on the other hand, is far riskier than simply giving a character reference and you should not take this lightly. Remember that when you guarantee a credit agreement, you are taking on a degree of responsibility for the debt.
On the bright side, guarantor loans push the borrower to become responsible in settling his debts and managing his finances. This loan instils a sense of disciple on the borrower.