Guarantor Loans
Guarantor loans can be a good solution if you have poor credit or are struggling to reach the loan size you need.
Why?
Because they offer potentially lower interest rates and more flexible terms, thanks to being backed by a trusted co-signer's support.
This helps mitigate the risks from a lender’s perspective, which means you can sometimes get a cheaper loan compared to other personal loan options.
In this article, we’ll explore how guarantor loans work, and the advantages, and drawbacks of undertaking this type of loan.
Let's delve into guarantor loans...
What is a guarantor loan?
You may have heard of a guarantor being used to secure a rental property, or a mortgage, but they don’t just help you to obtain housing.
A guarantor can also help you on your way to attaining a loan!
A guarantor loan is a type of unsecured loan which brings in a second person to act as a guarantor for the funds you’ve borrowed from a lender.
Typically, people choose a family member or friend with a better credit score than their own to act as a guarantor.
Essentially, this person will agree to make repayments to a lender if you’re unable to, for whatever reason.
In turn, having this arrangement in place helps render the loan a less risky prospect for your lender, as they subsequently have a second, more creditworthy person who can be held responsible for your debt.
And this means they can offer you better interest rates compared to other options. Guarantor loans are typically sought by borrowers who have poor credit scores or histories.
By bringing a guarantor with a good credit score into the equation, you may be able to secure a loan amount which you wouldn't otherwise be able to obtain.
Are guarantor loans a type of personal loan?
Yes, guarantor loans are a type of personal loan.
They are unsecured, meaning that you don’t need to put up any collateral such as a house or car in order to guarantee your repayment of the funds you receive.
A lenders’ offer of this type of loan is based on your, or your guarantor’s, creditworthiness, along with your ability to repay the loan.
The involvement of a guarantor with a good credit history in your application for a guarantor loan increases the chances of your application going smoothly.
And like other types of personal loans, guarantor loans can be used for a wide variety of purposes.
What is the process of applying for a guarantor loan?
The process of applying for a guarantor loan is similar to that of other personal loans.
Typically, you will follow these steps:
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To begin your guarantor loan journey, it’s a good idea to research and compare the various lenders on the marketplace. This will allow you to find a loan which meets your needs in terms of interest rates, additional fees, and repayment terms.
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A borrower and guarantor will need to provide adequate documentation to support their application and ensure that they are both eligible to enter into a guarantor loan agreement. Official documents can include things like proof of identity, details about your income, and something that proves your home address such as an energy bill, or council tax letter.
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Once you’ve completed all the above steps, the lender will review your application and documentation. If they’re missing anything, or want clarification of any details you’ve provided, they may contact you or your chosen guarantor to confirm some additional information.
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If all goes well and you get approved for a loan, you and your guarantor will then be asked to sign a loan agreement. This is a finalising document which outlines the terms and conditions of the loan. It will be your last chance to review the fine print including the interest rate you’ll pay, the duration of your repayment, and the dual responsibilities of yourself and your guarantor.
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When the loan agreement has been signed and received by the lender, the funds you’ve borrowed will usually be transferred to your bank account within a couple of days, enabling you to cover your expenses.
Whilst the process of obtaining a guarantor loan is relatively straightforward, it's important to remember that the process might differ slightly between lenders.
Clarifying how your loan will work prior to applying is a good way to get a full picture of the situation you’re entering.
What are the drawbacks of a guarantor loan?
Guarantor loans can be a lifeline for individuals who may have been declined for other types of loans or credit but are facing a financial dilemma.
However, as with any personal finance product, they do have some drawbacks which you should consider carefully before applying.
Limited availability
Unfortunately, not all lenders facilitate guarantor loans. For this reason, you may have less lenders to choose from compared to other personal loan options.
High interest rates
Despite having the capacity to facilitate larger loan sums, guarantor loans can come with higher interest rates than other types of personal loan.
This is due to the added risk and administrative costs which are associated with providing a guarantor arrangement, in comparison to an unsecured personal loan which does not require a borrower to source a third party to co-sign their loan.
Risk to your guarantor
Irrespective of their own good credit history, your guarantor will be undertaking significant financial risk by agreeing to co-sign on your loan.
This is because they are responsible for repaying the loan by law in an instance where you default.
Whilst they have wilfully agreed to help you out, this risk can sometimes put a strain on your personal relationship with your guarantor, especially if you run into trouble with making the necessary repayments and they need to step in.
Impact on the credit scores of all involved
If you end up having difficulty in making your expected repayments on a guarantor loan, your credit score can be negatively impacted.
However, as there is now a third party in the mix – your guarantor - their credit score may also be negatively impacted too.
It's important for those who are thinking about taking out a guarantor loan to closely weigh up the pros and cons before applying.
By ensuring you only borrow what you can afford to repay, you will keep your lender and your guarantor happy.
If you’re a potential borrower, you could also consider comparing alternative types of personal loan available before making the decision to involve a guarantor.
What can a guarantor loan be used for?
Guarantor loans are highly flexible and can be put to use in a number of different ways:
If you find yourself in a situation where you need to cover a big cost, such as an expensive car repair or a dentistry bill, a guarantor loan could help you meet your short-term financial needs.
Combining multiple debts into a single guarantor loan could help you streamline your finances.
You might also be able to walk away with a lower interest rate if you have a family member or friend with a good credit history to support your loan application.
Those big expenses which life demands you to cover, such as home improvements or a new car, could be within your reach if you are able to get a guarantor to lower the risk which your loan application might pose to a lender.
Some people use a guarantor to help them take out a to pay for further study. If you are a young person with next to no credit history, or somebody looking to upskill, a guarantor loan could be the route towards achieving better professional prospects.
There are a number of other popular uses for guarantor loans such as starting a business, financing a wedding, or covering the cost of a family holiday.
It’s important to only borrow what you can afford to repay and be aware of the interest and other fees associated with guarantor loans.
How much can you borrow with a guarantor loan?
The sum you’re able to borrow with a guarantor loan depends on the lender and their specific policies, which can vary depending on who you choose to work with.
Your own financial circumstances and deemed creditworthiness, as well as your guarantor’s, will also come into the equation.
In many cases, guarantor loans can afford you higher borrowing limits than other types of personal loans.
This is because the involvement of a guarantor can offer added security for the lender, as there’s two avenues they are able to pursue in the event that they must recover their money.
Some lenders in the marketplace may offer guarantor loans starting at £1,000. Meanwhile, others offer loans exceeding £25,000.
The amount you’re able to borrow will also depend on your perceived capacity to repay the loan, as well as your credit score and financial history related to managing your use of credit products.
It's vital to remember that whilst a guarantor loan can provide you with access to a larger sum of cash than other types of personal loans, you should only borrow what you’re sure you’ll be able to repay.
You should take the time to consider your current monthly budget to make sure that you can make the repayments which will be expected on time, and in full.
This mitigates any potential for your credit score to be damaged by defaulting on your loan or having to call on your guarantor to make repayments on your behalf.
How long will you have to repay a guarantor loan?
The time you’ll have to repay a guarantor loan will hinge on the lender you select, and the terms of the loan agreement which you sign.
The timelines on repaying this type of loan are variable, ranging from a year to seven years, or even longer in certain cases.
You and your selected guarantor will need to agree on the repayment term from the offset of the loan. The repayment schedule will be fixed, then outlined in your agreement with the lender.
The outlined schedule for making your repayments will usually consist of the total monthly payment, the due date for each payment, and the overall amount of interest that will be charged across the life of your guarantor loan.
Before taking out a guarantor loan, it's important for both you and your guarantor to sensibly consider the length of the repayment term.
This will help you to ensure that you can comfortably afford the monthly repayments until you’re done paying off the loan.
You should also beware of the fact that longer repayment terms often end up costing more in interest charges, even if your monthly repayments are lower.
For this reason, it is wise to compare different lenders and loan terms to find the best loan solution for you.