A quick guide to guarantor loans – Is it the right option for you?
Are your loan applications getting rejected constantly? This may be because of your poor credit history. It’s also possible that you have no credit history at all. It will be difficult for banks to trust you with their money. Such a case prompts many people to use payday loans, but these are notorious for absurdly high-interest rates.
Thankfully, guarantor loans offer a more budget-friendly option. This quick guide should equip you with ample information to determine whether a guarantor loan best fits your needs.
What is a guarantor loan?
When you apply for a loan with a poor credit rating, you can have a second person sign as a guarantor. A guarantor loan is a type of unsecured loan where the guarantor takes on the responsibility of paying for the loan in case the borrower defaults.
It’s worth noting that guarantor loans aren’t entirely new. In fact, it used to be the primary means by which banks lent money before computer credit ratings took over. Today, many landlords and mortgage companies still ask for guarantors.
Who should use a guarantor loan?
As noted, this loan is geared toward people who struggle with their loan applications. In most cases, the rejections are caused by either of two reasons: poor credit history or not having a credit history at all.
By having a guarantor co-sign with you, your chances of getting approved will be much higher. You can also increase the loan amount since banks will feel more confident about lending you money.
Who can act as a guarantor?
The person acting as guarantor could be your friend, family member, or a colleague. Some lenders will restrict on their relationship to you and others can be more flexible. For example some lenders will not accept a financially linked guarantor.
Of course, you shouldn’t expect your loan to get approved if the guarantor also has bad credit. The lender will determine whether the guarantor is capable of continuing loan payments in case you default. Some banks only accept guarantors who are homeowners, as their property can be listed as security.
The guarantor may need to provide bank details, bank statements, and identification during the application process.
What happens when you default?
If you fail to keep up with payments or default on the loan, the lender will require the guarantor to pay. Refusing to do so could mean that the guarantor faces missed payments being registered on their credit report.
What to consider before applying?
It’s tempting to jump right in without considering everything that could happen. Before applying for a guarantor loan, you need to make sure that you really need a guarantor. There are many cases in which applicants simply want a bigger loan. In which case you should consider whether this is a good enough reason to proceed with the application. Aside from the risk of defaulting on the loan, it’s also possible to damage the relationship between the borrower and the guarantor.
