Is a guarantor loan right for me?
If you are experiencing difficulties in getting a loan then a guarantor loan might be an option. Whether for business or personal use, this type of loan could unlock your borrowing power, without you having to offer up security.
Guarantor loans are often provided by lenders who specialise in this type of borrowing for those who would otherwise be rejected by mainstream lenders, such as banks and some credit card providers. Young people who are just starting out and have no credit history or those who have found themselves in financial difficulty in the past are usually eligible.
What is a guarantor loan?
A guarantor loan is a type of unsecured loan that typically lasts between 1 and 7 years, with the borrowing amount anywhere between £1,000 - £15,000. Your guarantor is usually someone you know. It can be a family member, colleague or friend, but they must be generally over 21 years old and have a better credit history than yours.
Guarantor loans work on a trust-based system and before computer credit scoring arrived, they were widely used. In fact, it’s still common practice for landlords and mortgage lenders to ask for guarantors today. Essentially, you are getting someone to not only vouch for you, but to promise that if you can’t make the repayments on the loan, they will do so on your behalf.
A guarantor loan is often a good choice for someone with little or no credit history as well as those who have a poor credit score. The added security makes it less risky for the lender. A guarantor is often someone close to you, like a parent or friend and although they may be willing to be your guarantor because they care about you, the position is not without significant financial risk. Anyone asked to be a guarantor should fully understand their own liability.
How does a guarantor loan work?
To apply for a guarantor loan, you and your guarantor will need to be thoroughly vetted. This means that the lender will check both your credit histories and they’ll be able to see if your guarantor has ever had any trouble paying bills in the past. It is not uncommon for the lenders to check affordability on the loan, so expect to be checked. They will assess whether lending you the money in the instance is the right thing, albeit you have a guarantor.
Guarantor loans often have quite high rates of interest compared to other personal loans. However, because someone like a friend or relative promises to step in and pay your loan if you have problems, there’s less risk for the lender.
Things to consider when taking out a guarantor loan
- Your guarantor needs to be someone you can trust, as much as you need to be trustworthy. It's a two-way street, and can potentially cause rifts in your relationship, so think wisely before you ask someone to be your guarantor.
- Your guarantor cannot be financially linked to you. i.e a spouse or someone you have a shared bank account with.
- If you miss a payment, your guarantor will be asked to step in and you could both be taken to court if the situation is not rectified.
- You will need a UK bank account in your name so that repayments can be made.
- Regular payments will improve your credit score over the term of the loan.
- Interest rates and other charges and fees may be higher with a guarantor loan, so make sure you are aware of these before you sign. Always read the terms and conditions.
- Some lenders will charge for overpayments or early repayment, while others will not. If they don’t, then you may be able to pay back your loan early at a lower overall cost. Again, check the small print before you sign.
- Only 51% of successful applicants get the advertised APR, and the better rates are usually reserved for those with better credit, so check that the rate is what you thought it was going to be, before making a decision.
Guarantor loan comparison
To find the most suitable guarantor loan tailored to your circumstances and credit standing try our moneymatcher. It will narrow down your search by taking into account your particular needs.
Set your desired loan amount and loan term to see a wider range of results. Specify your residential status, credit history and employment status and you’ll slim down the options to suit you even further.
moneymatcher will then return you a list of lenders that are most likely to lend to you based on a soft credit check or quotation search.
Written by Robert Bester
Published on 22nd March 2018