Introduction
There are many different types of loan available for debtors, each with its own advantages and disadvantages, and it is important to understand the difference between them before you take out a loan. One of the more unusual types of loan you may have encountered is a Guarantor Loan, but it can be unclear exactly what this is and why it is so good for people starting out with no credit history or a bad credit history. Do not worry, though. We are going to walk you through the basics of guarantor loans and how they work in the article below. Read on below for a basic introduction to guarantor loans!
What is a Guarantor Loan?
Guarantor loans are a type of loan designed for those who struggle to be approved for other types of loans. This type of loan offers the opportunity to borrow money with the help of a guarantor: a family member or a friend who “guarantees” to pay the loan off if you are somehow unable to. This essentially reduces the risk to the lender, particularly if you have a history of defaulting on debts.
Guarantor loans are ideal if you are just starting out and have not yet built up a credit history. They are also good for people with a poor credit history and a history of poor credit management. If you are approved for a guarantor loan and keep up your payments, you can use this as a good way to rebuild your credit history, overwriting your previous poor track record.
How do Guarantor Loans Work?
On a basic level, guarantor loans work pretty much like any other type of loan. You borrow money from a lender and then pay it back in monthly installments (usually with interest added on top). The big difference is that, while a regular loan only involves you and your lender, a guarantor loan involves a third person: the guarantor. This is someone who guarantees to make your payments if you are unable to.
Sometimes, the loan will be received initially by your guarantor rather than you. In this situation, the guarantor will then have two weeks to decide whether or not to accept the terms and then either pass the loan on to you or reject it and give it back to the lender. If your guarantor is happy with the terms, you will receive a lump sum of money and then have to repay it over a set period of time, as defined in the terms of the loan. This is usually between one year and seven years but depends on the lender and the amount of money being borrowed.
What is a Guarantor?
A guarantor is someone who makes a guarantee for someone else. In practice, that means that your guarantor is someone who promises to repay your debt for you if you somehow can’t pay it. That is a major responsibility, and a difficult position to put someone in: being a guarantor for someone else can have a major effect on the guarantor’s credit score, and if anything goes wrong, it can become extremely expensive very quickly.
Guarantor Loans vs. Other Types of Loan
The biggest difference between guarantor loans and other types of loan is who can be approved for them. While most loans are only available for people with good credit scores, guarantor loans offer an opportunity to anyone to access finance, even those who would be rejected by other lenders. This means guarantor loans are an ideal way to support major life events or deal with unexpected expenses.
Guarantor loans are also a good way to rebuild your credit score after a period of problems. If you can reliably make repayments on a guarantor loan, you can quickly and effectively improve your credit score, opening up other avenues for your financial life. For example, rebuilding your credit score with a guarantor loan will let you access loans with better rates, as well as make it much easier to do things like applying for credit cards or mortgages.
What Risks Does a Guarantor Loan Have?
For the debtor, guarantor loans are not massively risky because of the guarantor acting as backup. For the guarantor, however, this type of loan can be very risky, as they will be expected to pay the loan back if you cannot make the payments for some reason. Guarantor loans often have much higher APRs than other types of loans, and this can add up fast if something goes wrong. So do not enter into one unless you are really sure you need it!
Who Should Be My Guarantor?
The most important quality in a guarantor is trust. You absolutely, unquestionably need to choose someone you trust completely. They will need to be someone close enough to you that you can happily and openly discuss finances with them and someone you can trust completely. In most cases, that will be a family member of some sort or a close friend, but it could just as easily be a work colleague or similar person with whom you have a close, trusting relationship.
On a practical level, there are a few legal requirements. A guarantor needs to have good credit history and be over the age of 21. In most cases, they will also need to be a homeowner, which limits your pool of candidates significantly. In order to register as your guarantor, they will have to provide proof of ID, bank details, and bank statements, as well as undergo a full credit check.
What to Look for in a Guarantor Loan
Just like any other loan, taking out a guarantor loan is a serious decision that needs to be made carefully. You will need to keep up with all of your repayments, so look at things like the size of the monthly payments and the APR (Annual Percentage Rates). Take your time and be careful, and use a comparison site to find the best provider for your needs.
Conclusion
Guarantor loans open options up to people with poor or missing credit history, but they are not something to be entered into lightly. The responsibility placed on your guarantor is enormous, and this needs to be approached carefully. If you and your guarantor are happy with the terms, however, a guarantor loan can be a great way to rebuild your credit after experiencing problems!
