If you've been looking for credit recently then it’s likely that you will have stumbled across guarantor loans as a possible option, particularly if you've been turned down by your bank or other mainstream lenders. When looking at the concept of guarantor loans, many people tend to ask the same questions. Here are the answers to some of the most common ones.
How does a guarantor loan work?
A guarantor loan works just like a normal unsecured loan, except that you need a friend or relative to ‘back up’ your application. This means that they vouch for your ability to pay the loan, your intentions for what you’re going to do with the money and, crucially, they’ll agree to pay any loan instalments that you miss for whatever reason. This, of course, is not something to be entered into lightly, and the guarantor lenders are fully aware of this, which is why they perform checks before paying out a loan to ensure that the guarantor is not going to have to pay back the full amount by default. In other words, you’ll have to prove that you can easily meet the requirements of the loan (i.e. the repayment amounts) so that the lender can lend to you responsibly.
What does my guarantor need to do?
Your guarantor will have to fill in a secondary application form alongside your own, in which they’ll need to give their details, they’ll also have to prove their identity and that they could pay the loan if they had to. They’ll also need to agree that they understand the implications. After this, as long as you pay the loan correctly, they don’t have to do anything. They won’t have to part with a penny unless you fail to make a loan payment and the issue cannot be resolved.
How is this better than if they borrow the money and give it to me?
Many people wonder if their guarantor can get a cheaper loan and simply lend the money to them, thus making the repayments cheaper. While this arrangement may work for some, it can also cause a few issues depending on the ability of the borrower to repay. What if a payment can’t be made? What if the person who has taken the money falls off the face of the earth? The guarantor would be left with a debt and the borrower would get off scot free. Of course, the chances of this happening are slim, and if you and your guarantor are happy with this arrangement then there’s nothing wrong with it, but it’s worth noting that a borrower will not see any improvements to their credit score whatsoever, even if they pay every single payment on time and in full. For your credit score to be affected, you’ll need to take out a loan in your name so that it can be recorded properly. Failing to do this means that you could miss out on cheaper credit in the future, not to mention find it easier to change utility companies, get a phone contract and live in your dream home.
How does a guarantor loan work?
A guarantor loan works just like a normal unsecured loan, except that you need a friend or relative to ‘back up’ your application. This means that they vouch for your ability to pay the loan, your intentions for what you’re going to do with the money and, crucially, they’ll agree to pay any loan instalments that you miss for whatever reason. This, of course, is not something to be entered into lightly, and the guarantor lenders are fully aware of this, which is why they perform checks before paying out a loan to ensure that the guarantor is not going to have to pay back the full amount by default. In other words, you’ll have to prove that you can easily meet the requirements of the loan (i.e. the repayment amounts) so that the lender can lend to you responsibly.
What does my guarantor need to do?
Your guarantor will have to fill in a secondary application form alongside your own, in which they’ll need to give their details, they’ll also have to prove their identity and that they could pay the loan if they had to. They’ll also need to agree that they understand the implications. After this, as long as you pay the loan correctly, they don’t have to do anything. They won’t have to part with a penny unless you fail to make a loan payment and the issue cannot be resolved.
How is this better than if they borrow the money and give it to me?
Many people wonder if their guarantor can get a cheaper loan and simply lend the money to them, thus making the repayments cheaper. While this arrangement may work for some, it can also cause a few issues depending on the ability of the borrower to repay. What if a payment can’t be made? What if the person who has taken the money falls off the face of the earth? The guarantor would be left with a debt and the borrower would get off scot free. Of course, the chances of this happening are slim, and if you and your guarantor are happy with this arrangement then there’s nothing wrong with it, but it’s worth noting that a borrower will not see any improvements to their credit score whatsoever, even if they pay every single payment on time and in full. For your credit score to be affected, you’ll need to take out a loan in your name so that it can be recorded properly. Failing to do this means that you could miss out on cheaper credit in the future, not to mention find it easier to change utility companies, get a phone contract and live in your dream home.