Guarantor Loans Explained

Why are guarantor loans an option for people with a poor credit history

Guarantor Loans Explained

When you borrow money, your credit history is a primary factor that any would-be lender will take into consideration. Your credit history consists of a record of every time you’ve had an agreement where you owe money and whether or not you paid it back. Credit cards, bank loans and overdrafts, phone contracts, utility bills, mortgages and rental agreements are among the sorts of things that appear in your credit history.

A poor credit score might not be due to not making your payments on time and in full, it could just be that you’ve not engaged in enough financial activity to have built a positive picture of your reliability.

If your credit history is poor or your credit score low you may find it very difficult to obtain a traditional type of loan.

This is also true if there are missed payments from previous loans or any outstanding existing debts that still need to be paid.

For some people in this position, a Guarantor Loan is potentially the only feasible way forward as it can provide a potential solution that many would be wise to consider as a viable and beneficial alternative.

What is a Guarantor Loan?

In real terms, a Guarantor Loan requires any loan to be co-signed by a guarantor, this may be a friend or family member with predictable and suitable income for the repayment terms.

It offers to the lender a buffer should the borrower default on the agreement, therefore transferring the responsibility to the guarantor themselves.

This financially dependable fallback can add significant weight to any loan application and greatly enhance the chances of any loan request being approved.

In most other ways a Guarantor Loan will follow the same structure as a standard loan, paying back a set amount over a set period of time with the extended third-party caveat that should repayments not be met by the borrower, the guarantor would need to cover them.

The role of the guarantor – Risks and Responsibilities

In the simplest terms, a guarantor is someone who co-signs on a loan as a default measure to ensure that the loan amount is covered and to protect the initial loanee.

Should the loanee then default on the payments, the guarantor as the name suggests then guarantees to cover the terms and amount of the loan.

It is vitally important that the guarantor fully understands their role, because once the documents are signed the guarantor then has a legal responsibility to cover the loan amount if the borrower cannot.

One vital consideration as a potential guarantor is that your own credit rating is not protected in this process, if the loan defaults any potential outcomes, be that a damaged credit history or legal ramifications will fall on the guarantor just as they do the borrower, so it is a choice that must be properly considered. 

Secured and Unsecured Guarantor Loans

Another key consideration is the two types of Guarantor Loans.

A secured Guarantor Loan requires the guarantor to back the loan with a primary asset, often their home if they are the owner. This asset can then be repossessed if the loan defaults.

With an unsecured Guarantor Loan, no collateral is part of the agreement, this requires the guarantor to have a good credit score to qualify as a guarantor before the loan is approved. It is therefore of extreme importance that a guarantor fully understands the type of loan requested.

A Final Word

While the above pitfalls do present significant risks in the event of non-repayment, if everything goes as expected and all loan repayments are made on time, a Guarantor Loan can be the perfect way to kick-start a struggling credit history and be the gateway to much greater financial independence for the future.