A guarantor loan is a loan option whereby a third party, usually a close friend or family member will guarantee your loan and act as guarantor for the lender. At one point or another, many of us will end up needing a loan. Different kinds of loans have different advantages, whether you need a 1000 dollar loan or just need to borrow $100, it can be difficult to know what loan is best for you in times of financial emergencies.
A guarantor loan is one option you may consider, which involves another person, usually a friend or family member ‘vouching’ for you to pay back your loan. It can be a great choice for those who have bad credit scores, which in turn means they often cannot get the best rates without looking towards a loan guarantor.
Why Would I Need A Guarantor Loan?
You might need a guarantor loan if you have a poor credit history and are struggling to get a loan on your own. You may for example have tried to borrow money online from numerous lenders and you may have been rejected, harming your credit score.
A family member or friend could opt to be your guarantor, this means they will cover the payments and ‘guarantee’ your loan if you are unable to repay it at any point. Guarantor loans can be a great option for those who are just starting out in their borrowing journey, particularly if they have a less than perfect credit score.
If you haven’t borrowed money before, chances are you won’t have much credit history, which can be a red flag for lenders. You may have a poor track record when it comes to managing your money, but a guarantor loan can help you secure a loan and start building a positive credit score.
What Are The Advantages Of A Guarantor Loan?
Much like other forms of short term and long term loans like payday loans online, cash advance loans and even some secured loans like title loans in the USA, guarantor loans come with their advantages which could help see you through a rough time, where you are struggling with your finances and need money fast.
Opting for a guarantor loan may:
- Help you improve your credit score (assuming you keep up with repayments)
- Help you secure a loan with a better interest rate
- Can be a good option if you have a poor credit score
- Gives the lender added security as your guarantor will be legally required to ensure the loan is repaid
A guarantor loan tends to be a good option for someone with a bad credit score.
If you have been rejected from other loans and from other payday lenders for instance, you might be more likely to look for a guarantor loan. Guarantor loans should generally only be used for big lifestyle or emergency finances and when absolutely necessary.
This could be home improvements, weddings, education, buying a car or a boiler breakdown.
How Does a Guarantor Loan Work?
With a guarantor loan, you borrow your money from the lender and then pay it back in monthly installments, like with an installment loan or other form of short term loan you might borrow.
The main difference with guarantor loans is that a third-party (your guarantor) is also part of the agreement. Your guarantor is legally required to make the payments for you if you cannot. Also, when you choose a guarantor loan, the lender will likely run a credit check on the guarantor to check their affordability too.
Who Could Be My Guarantor?
Your guarantor is the person who is vouching for you to repay the loan and who effectively ‘secures’ the loan for the lender. Your guarantor will need to be somebody financially stable and with a good credit score. They will also need to be somebody who trusts you. Usually, people choose to use a family member or close friend as their guarantor.
If you are choosing to be a guarantor, remember that you are promising to repay their debt if they are unable to and this may well have financial implications for you. This may therefore affect your credit score.
What Are The Risks Of A Guarantor Loan?
Guarantor loans can be an expensive way to borrow money and they are a form of short term loan and a form of unsecured personal finance which means they will cost the borrower more.
Often, we see higher APRs than other types of loan when loans like guarantor loans in the USA are used. Firstly, make sure that you truly need to borrow before you apply for the loan. Always make sure you know you can keep up with repayments before you take out the loan.
Guarantor loans may be less risky for the borrower, but your guarantor might be taking on more risk. If you are considering being a guarantor, make sure you fully understand the terms of the loan and do your own research on what is required of you.