Asking a friend for money can be risky. Before asking for a loan from your friend, you need to think about a few things;
- Will you be able to repay the loan?
- How long it will take for you to repay the loan?
- Is it an interest free loan?
- Will it impact your friendship?
Another alternative to directly lending from a friend could be applying for a guarantor loan. A usual loan is between you and the loan provider but with a guarantor loan a third person is involved and that is your guarantor.
Figure 1 Sourced from Glo’s Facebook
What is a ‘Guarantor Loan’?
A ‘Guarantor Loan’ is a loan that requires an individual to co-sign a credit agreement. The guarantor will be a trusting and reliable individual that will agree to repay the borrowers debt should he or she default on agreed repayments.
How can a Guarantor loan be beneficial?
Lenders of guarantor loans don’t rely on your credit score to determine whether you will receive the loan or not. They rely on the social contract you will make with your guarantor and depend on that to be a way to alleviate risk and increase the likelihood of you paying back your debt.
If you are looking into becoming a guarantor for a relative or friend, you must ensure that:
- The individual can meet their repayment responsibilities
- They are borrowing for a good reason
- You are willing to take over the loan in the circumstance the person who is applying for the loan is unable to meet payments
- You are 18-70 years old
- You are financially independent from the person who is applying for the loan – you cannot share finances
Features of a guarantor loan:
- A fixed interest rate that allows you to budget knowing your repayment amount will remain the same. This is provided that you are making repayments on time.
- If your repayments are not made on time, a daily charge will be made on the amount you should have paid. This results in an additional charge added to your loan that ends up costing more and increasing the time-frame of paying off your loan
- You do not have to be a homeowner – tenants are fine. However, you must have secure and separate finances to the borrower
Glo have created an infographic that helps you decide whether it is a good idea for you to take out a guarantor loan. To see a clearer image you can visit Glo’s guide.