Thinking about taking out a guarantor loan? From the ‘how’ to the ‘who’, we’re spelling out the important facts you need to know before you make a decision.
If you’re looking into taking out a guarantor loan, there are a few things you need to consider before you sign on the dotted line. We’ve delved into the questions you might be asking and explained some things you may need to know.
1. What is a guarantor loan?
A guarantor loan is like any other unsecured standard loan - you’ll borrow a certain amount over a set period of time and repay the sum including interest with monthly payments. Guarantor loans are an option for someone who may have been turned down for credit previously for whatever reason.
The difference is, you’re not the only person who’ll be held responsible for repaying the loan. If you can’t keep up with your repayments the lender will ask somebody else to cough up the money for you - and that person is your chosen guarantor.
The interest rates on guarantor loans usually have a higher rate of interest to reflect the borrower’s financial circumstance and the risk to the lender.
2. How does a guarantor loan work?
In many ways, a guarantor loan works just like a normal unsecured standard loan. The only differences you’ll find will be a) in the application process and b) what happens if you can't repay the loan.
When you apply for a guarantor loan, not only will you be asked for your personal details, finances and credit history, but your guarantor will be too. The lender will want to check to see if the loan is affordable for not only you, but also for your guarantor. This is to ensure that if you are unable to make the repayments, your guarantor can afford to cover the debt if you can’t. They might ask to speak to both you and your guarantor before they accept your application.
If you miss payments, the lender will chase you to recover the costs, they may also contact your guarantor to ask them to pay in line with the agreement. Remember, a few missed payments can put your account into default.
3. Who can be a guarantor?
There isn’t a hard and fast rule about who can be a guarantor and who can’t. The general rule of thumb is that the guarantor will need to have a good track record of borrowing in order to put the lender’s mind at ease.
It’s also important that you can trust your guarantor - and that they trust you, too. Covering someone's debts is a big responsibility, and if you don’t meet your monthly repayments on time, it could have a potentially big impact on your relationship and guarantors finances.
It’s worth looking at the lender’s criteria before you apply. For example, they might have certain requirements, like that your guarantor be over a certain age, be a UK resident, a homeowner; and be able to demonstrate that they can afford the loan repayments.
4. Why choose a guarantor loan?
Many people choose a guarantor loan because they have a poor credit history or a thin credit file. If you struggle to get accepted for a loan because of your credit score, having a partner, family member or close friend co-sign the loan could help you obtain credit.
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