If you’ve got a limited credit history, or you’ve had difficulties managing money in the past, you might find you’re only offered guarantor loans while hunting for finance. So, what is a guarantor loan? To give you a clearer idea of what you’re actually being offered, we’ve put together this quick guide to help you decide whether this type of loan is right for you.
What is a guarantor loan?
A guarantor loan is a type of loan that requires another person to take on your debt if you fail to keep up your repayments. They’re usually offered to individuals with a low credit score or little to no credit history. This is because based on the information the lender has, the lender needs a little more certainty that the loan will be paid back.
Who can be a guarantor?
If you’re thinking of accepting a guarantor loan offer, you’ll need to find someone willing to be your guarantor. This will usually be a friend or family member. However, your guarantor can’t be financially connected to you, which usually rules out partners or spouses. To be your guarantor, a person will need to:
- Be over the age of 21
- Have a UK bank account
- Have a good credit score
- Be financially independent from you
Depending on the loan and the lender, sometimes your guarantor will also need to be a homeowner.
How do guarantor loans work?
With a guarantor loan, the lender would lend you money just like with a non-guarantor loan. You’d then need to pay it back in monthly instalments, plus interest. Interest rates can be higher on guarantor loans, so it’s important to make sure you’re aware of the interest rate you’re being offered.
The key difference is that if you default on your loan (i.e. you become unable to repay the cost of your loan in full), your guarantor will have to find the money to cover the cost. So, if you’re thinking about becoming a guarantor for someone you know, think about it carefully before you commit. Once you agree to be a guarantor for a loan, you can’t change your mind at a later date.
What are the benefits of guarantor loans?
If you’re confident you can afford to take out a loan, a guarantor loan can not only help you access the finance you need, but it can also help you build, or rebuild, your credit score. By making your repayments in full every month, you might find your credit score improves enough to make you eligible for other credit products in the future.
What’s more, if you’re keen to be financially independent as quickly as possible, once your credit score improves you may become eligible for a personal debt consolidation loan. You could then use this to pay off your previous guarantor loan.
If you are thinking of consolidating existing borrowing you should be aware that you may be extending the term of the debt and increasing the total amount you repay.
What do I need to consider before I take out a guarantor loan?
When you take out a guarantor loan, you need to be aware that your guarantor will have to cover the cost if you fail to pay back your loan. If they can’t, it can have a negative effect on their credit score and they risk being taken to court.
How do I compare guarantor loans?
When looking at guarantor loans, you’ll want to look at the following things:
- The monthly repayment amount
- The APR (Annual Percentage Rate)
- The loan term (how long you have to repay your loan)
Before you look for loan offers, you’ll need to decide what is most important to you. For instance, are you looking for the lowest possible monthly repayments or would you like to pay off your loan as quickly as possible? Once you know what you’re looking for, you’ll be able to compare your loan offers more effectively.
Want to search for and compare loan offers from our panel of UK lenders? Fill out our quick application form to check your eligibility without affecting your credit score.