There are lots of different types of borrowing options on the market, including guarantor loans. They are a type of unsecured loan, but with a fundamental difference - you’ll need another person to act as a guarantor.
If you’ve got a history of bad credit, you may have given up hope of being approved for an unsecured loan. However, a guarantor loan may make you think again as it’s far more accessible than other types of credit, even if you’ve had problems paying your bills in the past.
So how does a guarantor loan work?
With a guarantor loan the lender has some security that the money will be repaid even if you default. Acting as a guarantor means being willing to take responsibility for making the repayments if you can’t pay the instalments when due.
Being a guarantor isn’t simply a matter of signing paperwork to act as a referee; in the event of non-payment it’s the guarantor’s job to step up and pay.
Of course, if you don’t miss any payments and repay your loan monthly when due, your guarantor won’t ever need to be involved. However, the lender has the guarantor on the loan as a safety net, just in case things change.
My credit rating is bad - can I apply?
Guarantor loans are specifically designed for individuals that can’t get credit elsewhere. If you haven’t yet built up a credit rating, or if you have a poor credit rating due to problems in the past, you could qualify for a guarantor loan.
If you’ve had multiple problems with CCJs, defaults and missed payments, you’d be forgiven for thinking that your application couldn’t be considered - but that’s not the case. Unless you’re currently bankrupt or in an IVA, there’s a very good chance that you will be eligible.
What matters more than your credit rating is the affordability. The lender will want to see that you have sufficient disposable income to be able to comfortably meet the repayments. If this is the case, the next step is to check whether your guarantor is acceptable.
If your guarantor has a bad credit rating, the lender is unlikely to approve the application. It’s fine if your credit rating is less than perfect, but the credit rating of your guarantor will need to be strong.
How much will it cost?
A guarantor loan is designed specifically for individuals who can’t get a regular unsecured loan due to credit problems. Even though there is a guarantor attached to the loan, the risk of non-payment is still greater than on other types of unsecured loan
For this reason, a guarantor loan is more expensive than other types of unsecured loan.
However, if you’ve not been able to get an unsecured loan elsewhere a guarantor loan can be an option to consider. A guarantor loan will also help to repair your credit rating, providing you make the repayments on time, so in the future you may be able to qualify for other types of cheaper credit.
The interest rates you’ll be charged depends on the lender, how much you borrow, the term and your personal circumstances. Some loans allow you to make overpayments without penalty while others charge it you try to pay it off more quickly.
What can I use a guarantor loan for?
In theory, a guarantor loan can be used for many different purposes such as buying a car, paying for a wedding or house renovations.
If you’re considering using a guarantor loan to consolidate existing debts, you might want to get some independent financial advice first. This is because if you default on your payments on a guarantor loan, your guarantor will automatically be expected to pay. If you want to consolidate existing borrowing because you are struggling with debt, it will be much harder to get help with the repayments. Options such as an IVA or repayment schedule aren’t always easy to access where there is a guarantor who is contractually obliged to repay on your behalf.
To get more information about guarantor loans, get in touch with Loans Warehouse today on 01923 678 870.