If you have a poor credit history, or not much credit history at all, it can be difficult to get a lender to approve you for an unsecured loan. If you’re not a property owner and don’t have the option of a secured loan, this can make obtaining finance a real challenge.
Guarantor loans offer a solution as you don’t need to have a perfect credit rating to apply. In fact, your credit rating can be poor and it won’t prevent you from being accepted. It may sound like an outlandish claim but the basis of a guarantor loan is very different to a standard unsecured loan.
What exactly is a guarantor loan then?
A guarantor loan is an unsecured loan that can be used just like a regular loan. You’ll receive a lump sum which will need to be repaid in monthly instalments with interest added to the total.
However, where a guarantor loan varies is that you’ll need another person to act as a guarantor. This is a type of security for the lender and it’s the reason why your credit rating is rarely a hurdle.
The individual who is agreeing to be a guarantor must have a good credit rating and be willing to act as a back-up. In the event that you don’t make the repayment on the loan, your guarantor will be required to pay up instead.
This is why it’s essential that you have a good relationship with your guarantor, as it’s a substantial commitment. Should you fail to pay the loan, they will be responsible for all the payments. Failure to pay would adversely affect their credit rating.
Your guarantor should be someone that you know well enough to ask, but must not be financially linked to you in any way, so not ideally not your husband or wife. A guarantor will normally live at a different address.
Are any credit checks required?
Yes, but the results aren’t as important as they are with other types of credit applications, such as a credit card or unsecured loan.
As the applicant, the lender will carry out a credit check on you. This is primarily to check that you don’t have severe debt problems currently such as being bankrupt or in an IVA. It doesn’t matter if you’ve had CCJs and defaults in the past; this won’t be a barrier to obtaining a guarantor loan.
The lender will also carry out a soft search on your guarantor. This won’t leave any imprint on their credit record but is to double-check that they have been able to pay their bills in the past and don’t have any financial problems.
Anything else I should know about guarantor loans?
If you are successful in applying for a guarantor loan, repaying it every month will help to rebuild your credit rating. It’s therefore very important that you make the payments on time.
You shouldn’t take out a guarantor loan unless you’re absolutely certain that you can afford the repayments. This is because your guarantor will have to pay up on your behalf if you default. The lender will carry out an affordability check when they’re assessing your application; the information on your credit file may form part of the affordability assessment.
Although the lender has the guarantor as a form of security, a guarantor loan is still a higher risk type of borrowing than a regular unsecured loan. This is because the credit rating of the applicant is usually worse. Therefore, it’s not uncommon for a guarantor loan to be more expensive than any other type of unsecured loan.
If you’d like to find out more about guarantor loans, we can help. Get in touch with Loans Warehouse today on 01923 678 870.