A guarantor loan is an unsecured loan that requires a friend or family member with good credit history to co-sign the credit agreement between the borrower and lender.
You’ve probably heard the phrase guarantor loan before but what exactly is one? Well, lucky for you, you’ve come to the right place to find out!
A guarantor loan is typically a loan that falls into the unsecured category. It is a type of bad credit loan that requires a guarantor (someone close to you, a family member or friend) to co-sign the credit agreement between the borrower and lender. This means that should you, the borrower, begin to default on your payments, then the guarantor is responsible for paying back the debt. Your guarantor will usually be someone very close to you who has a good credit score.
By having a guarantor, it makes it less risky for the lender because, if the borrower falls behind on their credit agreement, they have the guarantor to fall back on and pick up the payments. The loans typically last from a short term of less than 1 year up to 7 years or more. Usually, you can borrow from as little as £100 up to £15,000.
Guarantor loans can be used for many different purposes. Most people use them when they find themselves in a situation where they can’t get access to a certain amount of money because of their bad credit score. So, for example, if you’re taking a mortgage out on a property or you have to pay for expensive training for your career. However, always remember, you’ll have to pay a higher interest rate due to the type of loan that this is.
Many people find guarantor loans to be beneficial. For someone who hasn’t got an excellent credit score or who just hasn’t built up enough credit to show they are a responsible borrower, it really can be a godsend. It can give you access to funds that you just wouldn’t be eligible for if you were applying alone. Some borrowers just need that extra helping hand to get them on track with responsible borrowing.
With any credit agreement that has a guarantor attached, there will always be a risk. The main one being that because of your not so great credit history or lack of, you’ll pay a higher rate of interest than you would if you were getting an personal unsecured loan through a more traditional way. You’ve also got to be crystal clear on your credit agreement. You’re bringing in another person to the agreement, and if you default on your payments, it means your guarantor will have to step in and pay up. So you’ve got to be sure that you can definitely afford your repayments. Money problems between friends and family members can cause a real strain on relationships. The lender is more likely to chase up with the guarantor if you fail to keep up with repayments as they are more likely to be able to pay. So if you don’t want a family member or close friend getting that call, always make sure you know exactly what’s involved in your credit agreement.
With any loan, there will always be some conditions that you have to meet to be eligible for the loan. It’s no different with a guarantor loan. To be eligible, you must:
Your guarantor will also have to meet some requirements to be eligible for the loan such as:
So, you’ll send off your application and the normal necessary checks will be made. They will check both the borrower and guarantor for credit checks, credit history, employment checks and homeowner checks. In most cases, affordability checks will also be made. After a full review of your requirements, the credit agreement will then be signed by both you and the guarantor and the lender will release the money to you. The loan is always paid to the guarantor and then by prior agreement, the guarantor will transfer to the borrower.
Before applying, you must always set out your financial plan. Write down all of your outgoings, incomings and calculate how much you need to borrow. Then, with your chosen guarantor, create a plan to show that you clearly know how much you will be paying back. Do your research and check out different lenders to see which one best suits your needs. If a lender has minimal information on their website, then it’s best to find someone else. A lender will want to make sure that you have all the information you need before applying. Afterall, all they want in this situation is to know that their borrowers are capable of paying back the loan comfortably.
So, the more information you have, the better your understanding will be of what is expected of you. Sometimes borrowers and their guarantors set out their own written agreement also. This shows that the borrower is on the right track towards being responsible about money and is serious about the loan requirements. It can also ease any tension between the borrower and guarantor. After all, the guarantor is putting a lot of trust into the borrower. However, if you make all your payments on time, there really is no reason that this way of borrowing shouldn’t be easy and simple. It also helps you adopt a healthy attitude towards money and the independence and responsibility to adhere to your repayment schedule.
If you are having financial difficulties or need to speak to someone regarding your financial situation before applying for a loan you can get free and confidential advice from The Money Advice Service, National Debtline or debt charity StepChange.
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Representative example: Borrow £1000 for 24 months at 24 equal instalments of £77.48. Total amount to repay £1,859.52. Interest £859.52. Annual interest rate 70% (fixed). APR rates range from 45.3% APR. to 1575% Max APR. Your APR rate will be based on your circumstances.
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