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Guarantor Loans – What Are They & How Do They Work?

Guarantor loans represent an option for those wanting to pick up a personal loan but have struggled to do so because of poor credit. In a guarantor loan, a third party takes responsibility for securing the loan, acting as security for the lender. In this way, guarantor loans act as a type of secured loan, which involves the principal of a loan being set against property or other assets.

guarantor loan

In the event of a borrower being unable to pay off the loan, these assets are used as collateral. By contrast, an unsecured loan is taken out without these assets, and the risk for the lender is offset by charging high interest rates on the principle offered.

As a result, a guarantor acts as the security for the loanee, and while not paying off the loan personally, is liable to cover the loanee if they do default on the loan. In most cases, a guarantor is a family friend, and has to be someone who either owns the property, has a good credit history, and is willing to provide assurances of their financial ability to pay off a loan.

The key benefit of having a guarantor for the loanee is therefore that they can borrow larger amounts, and pay off the interest. Effectively, the loanee with a poor credit history can depend on another’s credit rating to gradually boost their own by paying back a loan on time and without any defaults or late payments made.

What Exactly is a Guarantor Loan?

Guarantor loans offer a possible solution for anyone who is looking to obtain a loan and has either a poor credit rating or no credit rating at all.

There is a range of loans currently available for those with a bad credit rating but the guarantor loan is different because that it provides customers who have a good character and willingness to pay,  the opportunity to raise a loan at an APR (Annual Percentage Rate) which is not prohibitive, should the need arise.

It is not without a little irony that many people who are in desperate need of credit are the ones least likely to get it but with the inception of the guarantor loan, the balance has been redressed a little. If this sounds like something that you could help you, what do you need to know about this type of credit?

Firstly, what exactly is a guarantor loan? A guarantor loan is an unsecured loan that has been created to offer those with poor or no credit history and no security to offer against the balance of the loan, an option to secure credit.

By assigning someone to act in the role of guarantor against the loan, lenders receive the security of knowing that if the borrower fails to keep up with repayments, there is someone on hand who will be legally obliged to continue making the payments. Because of the assurance that the debt will be paid off by the guarantor in the event of a default, guarantor loans are available at lower interest rates in return for that level of security.

How They Work

Guarantor loans are typically arranged to cover loans that can range from £500 to £5000 and are generally set with low monthly interest, or on a fixed rate basis. Again, the guarantor should be suitably qualified to act as security for the loan, and cannot be the spouse of the borrower.

Guarantor loans can also be set up at short notice by a bank or lending agency if the guarantor is willing to be subjected to a credit rating inspection. An application is made for a loan by the borrower, with the signed intent of their guarantor being to secure it.

Once the guarantor is approved, the loan is set up, and terms and conditions are agreed to ensure that the guarantor is willing to step in if necessary. Once the loan is paid off, the borrower should have sufficiently boosted their credit rating to not need a guarantor. Many guarantor loans are also made for mortgages, which can mean that the borrower will have gained both a better credit rating and a property on which they can base future loans.

Who Can Act as a Guarantor?

This naturally leads to the question, who can you ask to be a guarantor? Basically, this can be anyone with whom you share a strong mutual degree of trust. This is most likely to be either a family member (not spouse or partner) or a close friend and will be someone willing and able to take over repayments if necessary.

Due to the new responsible lending policy which has been implemented by many loan companies, the guarantor will be expected to be a homeowner, have a regular income, and positive credit history.

Although the guarantor will be expected to be a homeowner, this requirement is not put in place to offer security against the loan, it is simply to allow the easy tracking of the person in question should the borrower default on any payments. As long as the guarantor is fully aware of their legal obligations to repay the loan should you default, there are no other requirements that must be met?

Associated Benefits of a Guarantor Loan

Guarantor loans are not suited to anyone with a record of falling behind on a payment schedule. The guarantor is there to act as a safety net and therefore will only be helpful to an applicant who can find someone who is deemed a secure and responsible individual to stand guarantor to the loan. Although it is the guarantor for the loan who will ultimately be responsible for the payments should the applicant default, this is a scenario that should not arise.

Because this type of loan is available to people who have a poor credit rating, it also offers the distinct possibility of helping to repair that rating by allowing the borrower to demonstrate that they can make regular repayments.

Some Caution

A guarantor is making a significant risk when they agree to secure a loan. The guarantor has to trust that the borrower knows how much they need to pay back and that they will only step in if they absolutely have to. In this way, many guarantors are parents or grandparents able to trust the borrower as much as they can. When drawing up a guarantor loan, it is also worth doing thorough research into the lender, and to direct any complaints to the Office of Fair Trading in the UK.

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