Guide: Guarantor Loans
How does a guarantor loan work?
The loan is just like any other form of borrowing – an agreed sum of money is loaned to the person applying for the loan for a specific period of time and at a certain interest rate. The person who has borrowed the loan will use the money for whatever it is that they need it for and make repayments on the loan in the way that has been agreed. The guarantor signs the same credit agreement as the loan applicant. However, the guarantor will do nothing unless the loan applicant finds that they can’t make payments on the loan – at this point the guarantor will step in and take over the payments on the borrower’s behalf.
Who can be a guarantor?
The idea of a guarantor is that they essentially provide some back up for the person who is borrowing the loan. As a result, the guarantor must be someone who is financially stable and someone who will be able to make the payments on the guarantor loans if the borrower cannot. The guarantor is agreeing to pay back the loan if the person who borrowed it can’t and so anyone agreeing to be a guarantor must be able to afford these repayments – as well as their own expenses - if they end up being called upon to make them. A guarantor must be aged 18-75 and should be someone who doesn’t have a history of trouble paying bills. The guarantor should also be a homeowner. As well as being able to make the payments on the loan if necessary, guarantor loans guarantors must also have enough resources to be able to cover all their own day to day living expenses too.
Why is a guarantor acceptable?
It is often difficult for lenders to really establish whether someone is a lending risk or whether they are likely to borrow responsibly. Although a credit score is designed to help do this, it is a fairly generic system and sometimes those who really need guarantor loans might fall through the cracks and be declined due to a technicality. The idea of a guarantor is that it is someone who knows the borrower really well – if that person is happy to vouch for them then that gives the lender the confidence to lend. Plus, if the borrower can’t repay the loan then the lender has another party to turn to instead.
How can you find a guarantor?
As the obligations on a guarantor are fairly onerous, it is usually necessary for that person to know the borrower really well. It might be that they are involved in their lives so they are sure that the loan is repayable at the same time as the borrower continuing to live their life. This usually means that most people ask family members to act as a guarantor – or a very close friend.
What are the guarantor’s responsibilities?
Where a borrower isn’t able to make a payment on their guarantor loans then the guarantor will be responsible for making the payment on behalf of the borrower. If the borrower should become bankrupt, enter into an Individual Voluntary Arrangement or pass away then the guarantor will become responsible for the entire loan – that means every payment until the loan is paid off, including the interest. As the guarantor takes on a lot of responsibility if the borrower can’t make the payments it’s important that both are aware that as soon as the borrower begins to run into any trouble they should let the guarantor know.
Who can’t be a guarantor?
There are restrictions on guarantors in terms of age – for example the very young (17 and under) or those who are over the age of 75. Someone who has a history of issues with their own borrowing – for example defaulting on their own loan repayments or not making repayments on a credit card – would not be a suitable guarantor. A guarantor must also be a homeowner so anyone who is renting will not usually be able to step into the guarantor role. Finally, there is a certain level of trust between the guarantor and the borrower and so it isn’t usually suitable for a stranger to act as a guarantor.
How do you apply for guarantor loans?
The application process is simple and similar to applying for other types of loans – the only difference is that information is also required about the guarantor. The application can be made online and a decision is provided almost straight away on whether or not the borrower is eligible for guarantor loans. After that the notification of the final approval is given to the borrower and the guarantor and the loan can be paid out. A borrower should be at least 18 years old before applying for guarantor loans, as well as being a UK resident with a UK bank account. With Cash Lady this can be achieved by clicking on one of the links above or next time you apply selecting the last tick box which will ensure that your application is seen by guarantor lenders as well as the payday lenders we work with.
What about affordability?
This is really important, both for the guarantor and for the borrower. It’s crucial for both to work out whether the repayments on the loan are affordable when combined with other regular payments and living expenses. The guarantor may well have to step into the borrower’s shoes at some point so it is just as key that the guarantor is able to make the repayments as the borrower.
How are guarantor loans different?
Most aspects of guarantor loans are very similar to other types of loans. The main difference is that a borrower can only apply for guarantor loans if there is a guarantor lined up. It’s not possible to apply for guarantor loans without a guarantor ready to back up the application.