Don’t let bad credit stop your from realising your dreams. Guarantor loans are a form of poor credit loan that can help you access the funds you need.
What is a guarantor loan?
A guarantor loan is a form of loan that provides a safety net for lenders if the borrower can’t pay them back.
Guarantor loans function as a second point of repayment for the financer. However, that means choosing a guarantor is a huge test of trust, as the guarantor is legally liable for the loan if you default or fail to pay. Guarantor loans often allow individuals with poor credit history to access more money than they would with a typical loan.
Read on to learn more about guarantor loans.
How do guarantor loans work?
Guarantor loans, generally, function similarly to other loans – you have a borrower, who borrows the money; and a lender, who provides the money. Then, there is a third entity – the guarantor, a person who legally agrees to pay back the borrowed money if the borrower doesn’t or can’t pay themselves. Ideally, this never happens. In an ideal arrangement, the borrower pays the lender back after an agreed period and the guarantor never has to worry.
However, if the borrower doesn’t pay back the funds, then the guarantor is legally required to pay back the loans. That means if you’re a guarantor, you could get stuck paying for someone else’s loan.
Getting a guarantor can increase the likelihood of you getting a loan or accessing more funds. However, it can also cause a great deal of financial strain on the guarantor if the borrower isn’t trustworthy.
Who can apply for a guarantor loan?
Guarantor loans are a more accessible type of loan, but you will need to meet some basic criteria:
- Applicants must over 18 and a UK resident.
- To apply, you need to hold a UK bank account.
- You must receive a regular income.
- Potential borrowers should be able to prove they can make repayments.
In addition to these points, you’ll need someone willing to act as a guarantor – and more importantly, you’ll need to be able to make the repayments without their aid. You shouldn’t apply for a guarantor loan if you aren’t confident that you can pay back what’s been borrowed.
Pros and cons of guarantor loans
Guarantor loans can be highly beneficial for borrowers, with many upsides over traditional unsecured loans:
- To get a guarantor loan, you do not always need to be a homeowner.
- Allows borrowers the opportunity to borrow amounts of money that they wouldn’t get on their own.
- Provides access to finance to borrowers with poor credit.
- Guarantor loans can have more favourable loan terms.
- As guarantor loans are a type of borrowing, they could increase your credit score. That means you may be able to get credit on your own in the future.
With guarantor loans, most of the downsides are felt by the guarantor:
- Guarantors may be liable for the outstanding loan balance if not repaid by the borrower.
- As a guarantor, you risk your credit score.
- Acting as a guarantor may reduce the likelihood of you securing loans for yourself at the same time, as your guarantor position on a loan may be considered as a loan itself.
Disadvantages for the borrower include potential relationship risks if financial difficulties do arise. Guarantor loans can also come with higher interest rates, as you’re seen to be a higher risk to the lender.
Are guarantor loans right for me?
Loans with a guarantor may allow you access to finance with poor credit, but they can put friends and family at financial risk. For that reason alone, and the strain it can bring, some people may not want to choose a guarantor loan. In some instances, finding a guarantor in the first place can be difficult. Before you think of signing up for a guarantor loan, you should learn everything there is to know about borrowing with a guarantor so you’re prepared for what it might entail.
Guarantor loan alternatives
If a guarantor loan isn’t right for you, don’t worry – there are other loan types available, even for those with poor credit or no major assets to use as collateral (like a home). Here are some you could consider:
- Bad Credit Loans. Loans for people with bad credit can give access to funding in a pinch, and if repayments are made, boost your credit score in the long term. However, as a higher risk borrower rates may not be as favourable. You’ll also have fewer options to choose from, as fewer lenders will be willing to loan to you with a poor credit score.
- Unsecured Loans. Unsecured personal loans can be a good alternative to guarantor loans. While you don’t need a guarantor to access an unsecured loan, borrowing rates may not be as favourable. However, repayments over time could help improve your credit score, and you don’t need to lean on anyone else’s finances. Additionally, you don’t need to be a homeowner for this type of loan, as it is not secured against your property.
Who can be a guarantor?
While anyone can be a guarantor for you, they should be someone you trust – usually a family member or friend. They need to be over the age of 21 with a favourable financial history. It’s worth noting that if your guarantor is your partner, they can’t be tied to you financially (through something like a joint account or mortgage).
Finally, a guarantor should be able to financially afford the loan if the borrower can’t meet their monthly repayments. As a guarantor your gross income isn’t a huge contributor, but you should be able to meet the repayments if the borrower defaults.
Your guarantor will need to pass a series of checks, and homeowners may be more likely to succeed.
How much do guarantor loans cost?
Guarantor loans can be more expensive than other types of loans, even with the guarantor’s support. That’s because these are still classified as high-risk loans. In some instances, you could be lumped with APRs as high as 50%. That’s substantially higher than you might see on a secured loan, but potentially lower than some bad credit loans.
FAQ
Can I get a loan using a guarantor?
Guarantors can increase the likelihood of you getting a loan, especially if you have poor credit. That doesn’t mean you need a guarantor loan though, and there are other options you may want to consider.
Can a guarantor get a loan?
Yes, they can – even if they’re a guarantor on a guarantor loan. However, when being assessed for loan suitability, it could make them less desirable to a lender. That’s because, even though it is not their loan, they have a financial responsibility to it. That means it could affect their eligibility to get some loans, depending on their circumstances.
Can a guarantor loan get declined?
Yes, a guarantor loan doesn’t guarantee that you can borrow money. In fact, you’ll still need to prove you can make the repayments on your own. However, a guarantor can increase the chances of you being approved.
Find your perfect loan with Norton Finance.
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