What are Guarantor Loans and why do people use them?
With high street bank lending criteria tightening up after the financial crisis, many people have looked for alternative ways to borrow money. This has led to a rise in the number of guarantor loans being taken out and also to a rise in the amount of companies out there who offer these loans. So what are guarantor loans and how do they work? Let’s take a look at some of the key points surrounding these types of loans.
A guarantor loan is usually between £1,000 and £7,500 which gets repaid over the course of around twelve months. Unlike your more typical bank loans or the money you would borrow from other lenders, you are not the only one involved in the agreement.
When you go and apply for a loan, one of the biggest problems people have is that they have a poor credit history, usually because they’ve been in debt in the past and have failed to keep up with their regular repayments on things like credit cards or previous loans.
With guarantor loan agreements, however, lenders such as Buddy Loans will let borrowers have another person on the agreement, who may have a much better credit history, meaning you’re more likely to be approved for the loan on a joint basis rather than being declined on your own merit.
It works by having the main borrower making the scheduled and agreed repayments, but if for whatever reason you are unable to do so – such as losing your job or being hurt in an accident and unable to go and earn the money to help you keep up with the repayments – then the other person will then be responsible for making the repayments on your behalf.
This other person, usually a close friend or a family member, is essentially telling the lender that they can be trusted to make the payments and if you can’t, so the lender then has the greater security of being able get their money back from one of two sources.
For somebody to qualify as a guarantor they usually need to be over the age of 18, own their own home, earn more than £1,000 per annum and have a good credit score.
If, for whatever reason, you find that the loan has helped you to consolidate or clear your existing debts, and you’re in a position to pay off the remaining credit early, then you’re unlikely to be charged the extra interest but this could vary from lender to lender so it’s worth looking into this before deciding on a lender.
Things to consider before taking out a guarantor loan
Guarantor loans have been the subject of much debate in recent months and there are some things you need to consider before taking out this type of loan. Mainly it is the guarantor who needs to be fully aware of the commitment they are making when they agree to take on the responsibility of backstopping your payment.
As we mentioned earlier, when someone agrees to be a guarantor for a loan they are effectively agreeing that they are liable to make the repayments if you can’t. If they also can’t make the repayments then they could be pursued for the money in exactly the same way that they could if they were the main borrower, including receiving contact from debt collection agencies. Another point they need to consider is that becoming a guarantor could also affect their own ability to borrow money in the future, as your loan repayments could be classed as a potential commitment and may therefore reduce the amount which they are able to borrow for themselves going forward.