“If you fail to keep up with your repayments, you may be hit with late fees and charges...”
The pitfalls of guarantor loans
As with any borrowing, there are risks to taking out a guarantor loan and it can definitely be argued that the guarantor is the one taking the greatest risk. This is because they will have to foot the bill should it all go wrong – and if you default on your loan, their credit history could suffer too.
Even if you are certain you can afford the repayments, you should think very carefully about whether a guarantor loan is a good idea, and about who you ask to act as guarantor. It’s important that you both understand what will happen if you find you’re unable to make your repayments, as the outcome of this could affect your relationship.
If you fail to keep up with your repayments, you may be hit with late fees and charges. Your lender also has the right to recover the debt from your guarantor. This means they’ll be responsible for repaying the money, and if they don’t their credit history could be affected and they may face legal action – as could you.
Before signing up to this type of loan, always have a really good look at the terms and conditions and make sure both you and your guarantor know exactly what you’re getting yourselves into. If something goes wrong with this arrangement, you run the risk of damaging – perhaps forever – a valuable relationship. With this type of loan, you’re not just taking a financial risk, but a personal one as well.
“There are also lenders available who specialise in customers who either have a poor credit history or who have not borrowed before...”
An alternative to guarantor loans
If you’re concerned about the level of risk involved to you and your guarantor with this type of loan, there are other options available. One is peer-to-peer lending – a scheme that matches borrowers with alternative lenders to those operating on the high street. It can provide a more affordable way to borrow for both individuals and businesses.
There are also lenders available who specialise in customers who either have a poor credit history or who have not borrowed before and so have not had chance to build up a credit history. Ocean Finance offers personal loans (44.9% APR representative) and won’t discount you automatically if you have a poor credit score. We also offer a credit card (34.9% APR representative) with a spending limit of up to £1,500 that, when used responsibly, can help you rebuild your credit history.
Another option is credit unions. These are cooperatives set up to provide financial services to people in a certain area or profession, and, again, they can have different lending criteria to the major banks and building societies.
Alternatively, you could approach a family member or friend to see if they’d be willing to lend you the money you need. It’s vital that you agree to a clear payment plan and that you stick to it, or your relationship could be jeopardised. It may be worth having a solicitor draw up a payment plan you both sign, to avoid any confusion later.