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Over the last decade, there has been a rapid expansion in the number of finance providers offering guarantor loans. These are an option available to individuals who may not have the best credit history or potentially no credit history at all.
If you are looking to take out a guarantor loan, but need to know more about how this finance option works, or how to interpret a guarantor loans comparison, we have put together a list of frequently asked questions to help you understand how these loans work.
What are guarantor loans?
Guarantor loans work by having the borrower team up with someone else who will promise to pay your debt if you find yourself unable to. Guarantors for loans are usually family members, but sometimes close friends are called upon to do this.
How do these loans work?
If an individual has a limited credit history, or their credit score is low, they may find themselves unable to take out a loan or obtain credit. Guarantor loans help to mitigate against the risk of someone defaulting on repayments by offering a safety net in the form of the guarantor who has agreed to make payments if issues arise. A guarantor will increase the chances of an individual with a poor credit history being accepted for a loan.
Are there restrictions as to who can apply for a guarantor loan?
In the UK, there are some key criteria which need to be fulfilled in order to be accepted by most of the guarantor loans providers. You must be 18 years old or over and you must have a UK bank account for funds to be paid into. You will need to be in full-time employment. Whilst the guarantor acts as a safety net, it is always expected that the person taking out the loan should be able to afford the repayments, hence the requirement of a full-time job.
In addition to these expectations, you must also have a family member or close friend to act as guarantor, who is willing to make your repayments should you run into difficulties.
Who can act as guarantor?
Here is where the rules may change based upon the loan provider. Be sure to look closely at all terms and conditions when making a guarantor loan comparison. Most guarantor loan providers will only accept guarantors who are over 21 years old, but others may accept someone over the age of 18.
What loan providers are all agreed upon is that guarantors must have good credit history, as well as having a UK bank account. What constitutes a ‘good’ credit history will differ between institutions, but a general rule of thumb here is if the guarantor could take out the loan amount that they are asked to guarantee, their credit history is likely to be good enough.
What should I look for in performing a guarantor loans comparison?
When comparing loans, you should look at the rate of interest, as well as the total amount payable. Is the guarantor portion of the loan secured or unsecured? This will have a major impact as to how the loan is administered should you default and the guarantor be called into action.
Other things to look at as you compare guarantor loans are the presence of additional fees or penalties if payments are missed or the guarantor is called upon.
I’ve been asked to be a guarantor, what should I do?
There is no simple answer to this question, as it is all about the person who is taking out the loan. Do you trust that they will be able to keep up with repayments and make them on time, every month? Do you think they can afford the monthly repayments?
The biggest question here relates to the worst-case scenario: are you sure you are able to maintain payments on the loan should you need to? For this reason, it is important that people only become guarantors for those they know very well and who can be trusted to keep up with the repayments.
What are the risks for guarantors?
In signing up to be a guarantor, you are confirming that you will be responsible for repaying the loan if the borrower is unable to. It is likely that the loan term is long – up to five years is commonplace. Guarantors are unable to discharge themselves as guarantor until the loan is paid off in full.
If you are considering becoming a guarantor, you should contact the loan provider in order to see how the loan is recorded with credit reference agencies. Some providers will register the guarantor once the loan is taken out, whilst with others, the loan will only appear on the credit file of the guarantor if the borrower defaults.
Will my credit score be affected if I am a guarantor?
When acting as a guarantor, there is no adverse effect on your credit score, provided that you keep up with repayments if the borrower defaults on the loan. If you do not keep up with repayments if you are required to, your credit score will be affected negatively.
How do I compare guarantor loans?
In order to compare guarantor loans available to you, you will need to give us some basic information about yourself, including your name and address and the amount you need to borrow. We will take a look at the loan providers out there and provide you with a list of options in order to provide your personal guarantor loans comparison.
We will generally only show you loans for which you are likely to be accepted if you apply. If you need to provide a guarantor for your loan, their details can be added when you are applying for the loan with the provider.
How do interest rates compare with traditional loans?
When making a guarantor loans comparison, it is likely that you will find that the interest rates are higher than those for an ordinary (non-guarantor) loan. It is also reasonable to assume that you will have fewer loan providers available.