When you need to borrow money, your credit history can be a significant factor in determining your eligibility. If you have poor credit, you may find it challenging to obtain a loan from a traditional lender.
One potential solution to this problem is a guarantor loan. A guarantor loan involves having a third party, typically a friend or family member, co-sign the loan agreement and assume responsibility for repayments if the borrower defaults. This extra security could increase your chances of approval, even if you have bad credit.
In this guide, we will discuss the benefits of a loan with a guarantor and take an in-depth look into how they work.
- A guarantor loan is a type of loan which is co-signed by a third-party individual.
- By signing, the guarantor agrees to make repayments if the borrower defaults, thereby providing the lender with increased security.
- Applying for a bank loan with a guarantor could increase your chances of approval if you have a poor or limited credit history.
- It’s vital that the guarantor fully understands their responsibilities before co-signing. They will be legally responsible for repaying the debt if you cannot.
Understanding Guarantor Loans
In many ways, guarantor loans are similar to other bank loans and personal loans. You borrow a set amount of money and pay it back over time with interest. Repayments are usually made in regular monthly instalments on a pre-agreed date.
However, guarantor loans are co-signed by a third-party individual who, in most cases, knows the borrower. They agree to take responsibility for repaying the debt if the borrower defaults on the payments. This person is called the guarantor.
The Benefits of Guarantor Loans
The main benefit of getting a loan with a guarantor is that it offers the lender more security. As a result, it can increase your chances of being approved to borrow money. For example, a guarantor loan may be a good option if you may otherwise be declined due to:
- No credit history
- A poor credit score
- Existing debt
- A track record of missed payments
Taking out a guarantor loan can help to improve your credit score, provided you make payments on time. Additionally, with a guarantor on board, you may be approved for a higher loan amount. However, interest rates for guarantor loans can sometimes be higher than they would be for a standard personal loan.
The Role of a Guarantor in the Loan Process
When applying for a guarantor loan, a key requirement is having someone who is willing to act as your guarantor. But what exactly does that entail, and what will they have to do? In this section, we will explain the role and responsibilities of a guarantor in the loan process and the risks that may come with it.
Responsibilities of a Guarantor
A guarantor is essentially a co-signer for the loan – typically a family member or close friend of the borrower. Guarantors may also be used for mortgages and other legal contracts, such as tenancy agreements.
By co-signing the contract, the guarantor ‘guarantees’ to step in and make repayments if the borrower is unable to do so. As such, they can be held responsible for your debt if you miss a repayment or do not pay on time.
It’s important to be aware that this is a legal agreement: any negative consequence that may fall on you may also fall on your guarantor. In the event that you cannot repay the loan, the guarantor’s own credit rating could be negatively impacted, as well as yours. Also, if the guarantor is unable to pay back the money owed, they could face legal action.
Unsecured vs. Secured Guarantor Loans
It’s worth noting that a loan with a guarantor can be either secured or unsecured. The key difference between these two types of loans revolves around the requirement of collateral.
Secured guarantor loans are backed by an asset belonging to the guarantor – usually their home if they own it. This asset can be repossessed if the borrower defaults on the loan. With an unsecured guarantor loan, on the other hand, there is no collateral required.
Eligibility Criteria for a Guarantor Loan
When applying for a bank loan with a guarantor or a personal loan with a guarantor, there are certain eligibility criteria that must be met.
According to UK law, both the borrower and the guarantor must be at least 18 years old, and they must both have the capacity to understand and agree to the terms. Typically, lenders also have additional criteria based on their own policies and risk assessments. These may vary significantly between lenders and even between different loan products. However, we have outlined some of the most common requirements below:
|Must be at least 18 years old Must be at least 18 or 21 years old
|Must be at least 18 or 21 years old, depending on the loan provider
|Must be a UK resident
|Must be a UK resident
|May need to provide proof of income
|Must provide proof of steady income or employment
|Usually require a credit check, though those with poor credit may still be accepted
|Must have a good or excellent credit history
|Must be financially stable and willing to make repayments if the borrower defaults
|Homeownership may be required for secured loans
There may also be stipulations regarding the guarantor’s relationship with the borrower. For example, some lenders require that the guarantor is not financially linked to the borrower (i.e. spouses and business partners may be excluded).
In summary, borrowers are often allowed more flexibility in terms of credit score and income, as the guarantor serves as a backup. Guarantors usually face stricter eligibility requirements, especially regarding creditworthiness and financial stability.
Applying for a Guarantor Loan in the UK
Now that you have an understanding of what a bank loan with a guarantor entails, you may be wondering how to apply for such a loan. The application process for a guarantor loan is relatively similar to that of a standard loan, but there are a few key differences to keep in mind.
01. Gathering Your Documentation
Before you begin your application, you will need to gather your documentation. This may include proof of income or employment, identification documents, proof of address, and bank details. In some cases, such as business loans, you may also need to provide details of how the funds will be used.
02. Choosing Your Guarantor
The guarantor will be legally responsible for repaying the loan if you default, so you should choose someone you trust. Look for a guarantor with a stable income and employment, and good credit history, as these factors will likely be essential to meet the lender’s requirements. Confirm that the potential guarantor is willing to take on this role and ensure that they fully understand the legal responsibilities and potential risks involved.
03. Choosing the Right Loan
When applying for a guarantor loan, it is essential to do your research. Compare different lenders and financial products and choose the right loan for your needs. Consider factors such as the lender’s reputation, interest rates, borrowing amounts, eligibility requirements and repayment terms.
04. Completing the Application
Once you have gathered your documentation and chosen the right loan, it is time to complete your application. You can usually apply for a guarantor loan online, in person at a bank branch, or over the phone. You will need to provide personal details about yourself and your guarantor, state the purpose of the loan and submit the required documentation. Be sure to read the terms and conditions carefully before submitting your application.
05. Waiting for Approval
Once the lender has reviewed the application and performed credit checks, they will make a decision on the loan. This process can take several days to several weeks, depending on the lender and the complexity of your application. If approved, they’ll provide a loan agreement outlining the terms, interest rate, repayment schedule, and other details.
06. Receiving the Funds
If your application is approved, you will need to sign the loan agreement and agree to the terms and conditions. Once this is done, the funds will be deposited into your account, and you can use them as needed. Some lenders may initially send the funds to the guarantor’s account as an additional layer of security.
07. Making Repayments
You’ll be responsible for making regular repayments according to the agreed-upon schedule. If you fail to make payments, your guarantor will be responsible for covering them, and your credit score may be affected. If you encounter difficulties with repayments, contact your lender as soon as possible to discuss your options.
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In summary, guarantor loans can be an excellent option for those who may be denied a traditional bank loan due to bad credit or other financial circumstances. By having a guarantor with a good credit history, lenders may have more confidence in approving a loan, as the guarantor will be responsible for repayments if the borrower defaults.
However, it is important to remember that becoming a guarantor is a substantial commitment, and both the borrower and the guarantor should understand all terms and obligations before committing to a loan agreement.
If you’re struggling to get a loan and you don’t have a guarantor, Consolidation Expert may be able to help, as our lenders consider a wide range of credit scores. Our lenders offer debt consolidation loans which are used to combine multiple debts into one loan with an affordable monthly payment.
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Guarantor Loan FAQs
Yes, having a guarantor can increase your chances of being approved for a loan. This is because it reduces the risk for the lender, as they can rely on the guarantor to make repayments if you default on the loan.
Guarantor loans provide an opportunity for individuals with bad credit to access funds. You may also be approved to borrow a larger sum of money if you have a guarantor. Lastly, taking out a guarantor loan could help to improve the borrower’s credit score if managed well.
The guarantor is legally responsible if the borrower defaults, which can place strain on personal relationships. Interest rates may still be higher than standard loans, and defaulting can affect both the borrower’s and guarantor’s credit scores.
Generally, anyone over 18 who is a UK resident can apply, though specific eligibility criteria may vary by lender. Even those with poor credit or no credit history may qualify with a suitable guarantor.
Guarantors will need to meet a minimum age requirement, which is usually 18 or 21. They must also have a good credit history and a stable income. Some lenders also require guarantors to be homeowners. The relationship between borrower and guarantor may also be subject to lender criteria.
Late repayments can lead to increased interest, late fees, and a negative impact on your and your guarantor’s credit scores. If you fail to meet the repayment terms, the lender may approach the guarantor for the money. This may put a strain on your relationship with your guarantor. If the guarantor does not pay, the lender may take legal action against them. This may include repossessing their home if the loan was secured against their property.
In the UK, guarantors can be legally pursued for payments once the borrower has missed a payment and has not caught up within the agreed timeframe. Typically, the lender will initially contact the borrower and make attempts to recover the payment. If unsuccessful, the lender will notify the guarantor and request payment from them. The process must comply with the UK’s Financial Conduct Authority’s guidelines, ensuring fair treatment and clear communication.
Alternatives to guarantor loans may include secured loans, credit builder credit cards, credit unions, or seeking professional financial advice to explore options like debt consolidation or other tailored solutions.
In most cases, you cannot change your guarantor after the loan is approved. The guarantor’s creditworthiness and financial situation form part of the loan agreement, and changes would typically require renegotiating the loan terms. Speak to your lender for details on their policies.
Many lenders allow you to pay off the loan before the agreed date. This can help save you money, as you will typically pay less in interest. However, check the specific terms of your agreement, as in some cases, early repayment fees may apply.
It’s important to do your research when considering applying for a guarantor loan. You should carefully consider your financial situation and that of your guarantor, including your income, expenses, and the amount you need to borrow. Carefully compare different lenders and products to find the best deal, and ensure you understand the terms before committing.
If you are facing difficulties, contact the lender as soon as possible to inform them of the situation. They may be willing to pause your repayments or extend the terms of the loan so that you pay less each month.
It may also be worth seeking professional financial advice to explore your options. If you have multiple loans to repay, one potential solution is debt consolidation. This means taking out a new loan to pay off your existing debts, leaving you with one monthly payment.