Sometimes, gaining a loan can be hard. This is especially true for those with a questionable credit history, or perhaps with no credit history at all. A guarantor loan can be a great way for those struggling to gain the trust of lenders elsewhere, as they offer a sense of security that agreed repayments will be paid correctly.
What is a guarantor loan, exactly?
Essentially, a guarantor loan is a type of unsecured personal loan in which the debtor is “guaranteed” by another party who hence becomes the guarantor. It is their job to ensure the repayment of the loan if the borrower cannot make the payments. This differs from a joint loan in the fact that the guarantor will not be contacted for payment until the borrower cannot pay. This usually occurs anywhere after 48 hours of a missed payment from the debtor.
These type of loans are directly aimed at people who struggle to get other loans, as they are often flexible and tailored to the needs of the borrower. Loan amounts can vary anywhere from £1,000 to £15,000 and the payback period can be short or long-term, with averages coming in between one and seven years. Guarantor loans can also be more affordable when compared with other kinds of loans, as they tend to have lower interest rates combined with a shorter payback term.
Unlike many other loans, most guarantor loan providers will allow the debtor to make overpayments, which will also help to reduce the longevity of the payback period and the total amount repaid.
What is required of a guarantor?
Even though the borrower does not necessarily need a good credit rating, it is vital that the guarantor has a good credit history. They will also need to be aged between 21 and 70 at the time that the loan is taken out and will need to be either employed or self-employed. Some lenders may allow a guarantor that is retired, so long as they can prove their income. A guarantor will need to provide the lender with evidence that they will be able to pay the loan off if the borrower cannot. Most loan providers will require bank statements, bank details and proof of identification of the guarantor before the loan application is accepted.
As well as this, lenders usually ensure that the guarantor is a homeowner for an extra sense of security. Being a home owner demonstrates the ability to handle money and often repayments of loans (i.e. mortgages) and reassures the lender that the guarantor will not disappear should they need to step in to pay the loan. In addition to this, if the guarantor is a homeowner, the borrower could be entitled to a higher amount of money with lower interest rates.
For guarantor loans, interest rates can vary depending on the provider and the credit worthiness of the debtor. They are typically between 39.9% and 59.9% APR representative. However, once an interest rate has been settled upon, the rate will be fixed for the agreed repayment term.
If the guarantor meets all the requirements, then the loan will be paid into their bank account upon which they can pass the funds onto the borrower. Repayments of the loan will often improve the credit score of the debtor. Of course, on the other hand if the payments cannot be made then their credit score will be negatively affected.
Despite this, if the borrower has recently been declared bankrupt, has been signed up to the Debt Management Plan (DMP) or has entered an Individual Voluntary Agreement (IVA), then it is unlikely that a guarantor loan application will be accepted even if the guarantor meets all the desired criteria.
Although the guarantor could be a relative such as a parent or sibling, a partner, a close friend or even a work colleague, they cannot be financially linked to the borrower. For example, they cannot be married to the debtor, in which they would share their finances.
As a guarantor loan is an unsecured loan, neither the debtor nor the guarantor’s homes will be repossessed should the repayments stop. The exception to this would be if the guarantor offered their property as a security possession to the lender. This is extremely inadvisable as nothing should be listed as a security possession if it is worth more than the loan itself.
Things to consider
Becoming a guarantor on this sort of loan is something that needs to be considered fully. It is important to assess whether the debtor is responsible enough for the loan if they could not find one elsewhere. It is also key to think about why the borrower needs the loan in the first place – could they simply save up the money instead of taking a loan out?
As a guarantor, ensuring you could repay the loan should you need to is the most important aspect before signing any contracts. If you nor the borrow can pay the loan, the lender is entitled to take legal action against you both.
As previously stated, it is also important to carefully contemplate what you would list as security should you be asked to. Are you willing to risk losing the possession if repayments fail?
Guarantors need also ensure that they receive copies of the credit agreement so as to know the details of the repayment plans. A copy of the guarantee contract will also prove useful.
It is also important that any notices to the borrower are also sent to the guarantor.
Guarantor loans can be extremely useful for hopeful borrowers who cannot find help anywhere else. However, consideration and caution is advised to those who are thinking of becoming a guarantor. If you’re unsure, it is crucial that you seek legal guidance.