If you’re in the process of searching for some credit and your bank has turned you down, then you may have found yourself looking at guarantor loans. They represent a very old way of borrowing, but are relatively new in terms of who is offering them and how you can apply. A guarantor loan can enable those who have been turned down by mainstream lenders to borrow higher amounts (£1,000 to £7,500) without the crippling interest rates that are offered by payday and instalment lenders.

Although the annual percentage rates of guarantor loans are still relatively high (usually just under 50%) compared to the mainstream credit providers, they still represent a huge drop in the amount that you would usually have to pay for credit if you have a poor credit history. The reason why the guarantor lenders are able to offer these amounts at these rates is down to the main factor of guarantor loans; the guarantor!

Your guarantor is a support for your application; in other words, they help you to get the credit by agreeing to pay for any repayments that you’re unable to meet. For this reason, your guarantor should be completely happy that you’re able to cope with the loan that you’ve taken out, and that you've obtained credit for all the right reasons.

One thing that guarantor lenders may do as part of the application process is to ask to see your latest bank statements and/or to go through an income and expenditure check with you. This is usually because the lender has a responsibility to themselves, your guarantor and you, so it’s important that they’re satisfied that you can afford to cope with the loan repayments. If they lent the money without first checking this, then many people who couldn’t really afford to take on credit like this would fall victim to payment defaults, which would cause a lot of stress and mean that the guarantor would have to pick up the tab. They’d have no choice in the matter if they had signed the credit agreement, as this is a legally binding document. Failure to pay on their part could mean further action taken against them, meaning that they’d be effectively punished for supporting a loan that wasn’t even for them.

It’s for this reason that it’s very important for both the guarantor and the borrower to be happy that they’re able to pay the monthly instalments. The guarantor will not have to hand over a penny if the borrower is able to make all payments in full and on time, and this is the way it is in the majority of cases that guarantor lenders deal with. Their fair practices of checking the ID and income of both borrower and guarantor protects all concerned. The borrower therefore can get a loan which is not only affordable, but is a higher amount than other lenders would be willing to give. The guarantor gets to lend a hand without actually having to part with any money (all being well), and the lender has fewer losses due to missed payments. 

Taking on a guarantor loan is not something that should be entered into lightly, but it should also not be a huge effort to pay every month either. If your guarantor loan payments are constantly on your mind and you worry about meeting them in full each month, then you may have bitten off more than you can chew. This is not the intention of a guarantor loan; they’re meant to be a fairer and more manageable form of borrowing compared to other credit products aimed at those with a poor or non-existent credit history.

Failing to make a guarantor loan payment means that your guarantor is likely to be asked to step in and make the payment on your behalf. This is what they signed up for when the loan was taken out, and they will be bound by contract to honour this. Of course, no guarantor is happy when they’re asked to make a payment, particularly when it comes out of the blue, so it’s important that you stay in contact with your guarantor and keep them in the loop as much as possible.

One of the surer ways to keep abreast of your payments is to plan well ahead. ‘Failing to plan is planning to fail’, so the saying goes. Knowing exactly what needs to go in and out of your account in any given month is an essential part of managing a budget. Working this out for your own expenses and income can help hugely when it comes to understanding what you’re able to pay.

It’s likely that an advisor would have gone through your income and expenditure with you when you applied for the loan, so using this information and looking at your usual outgoings, you could try to work out just where you’re spending the most each month. Looking ahead at your potential earnings and the essential things that you need to pay for (accommodation costs, council tax, food, utilities etc.) should give you a good idea about how much you have left for other things. Always count your debt payments in with your essential expenses, as not paying them could have consequences which far outweigh the results of you not being able to go on holiday or afford that night out with friends. A missed credit payment could affect your credit file for up to 6 years, making it hard for you to get credit elsewhere in the future.

If you have a variable income, then it could be worth setting aside an extra month’s worth of loan payments when you've had a good income month, just in case you’re unable to meet your payment commitments at some point in the future. This will not only give you peace of mind, but also will act as added protection for your guarantor, who will have to foot the bill if you ever fail to make a payment. This could put strain on your relationship and prevent them from helping you out in the future.