Half of the British adult population are living on the ‘financial edge’, according to guarantor loans. Yet are guarantor loans safe?. No wonder more and more of us are taking out
At CashLady, we want to help you understand all aspects of financial lending, not just same day loans. So we’re back with another part in our series on guarantor loans. This time we’re looking at whether or not guarantor loans are safe.
What happens when you begin the process?
When taking out a guarantor loan, a guarantor is required to co-sign the loan with the borrower. This adds an element of security from the perspective of the lender. They know while you have a poor credit rating, the guarantor typically doesn’t, so they’ll be able to trust the guarantor to repay the loan.
If you are considering taking out a guarantor loan, it’s important to be aware of all the facts. It doesn’t matter if you are the borrower or the guarantor. Make sure that you fully understand the financial agreement you’re entering into.
If you agree to be a guarantor, you will ultimately be responsible for repaying the loan, should the borrower become unable to. But what else do you need to know about guarantor loans? Are they really safe for both the borrower and the guarantor?
Are guarantor loans safe for the borrower?
The concept of a guarantor loan rests on a guarantor being able to repay the loan if the borrower is not able to. Because the guarantor co-signs the loan and takes the final responsibility for the finance, it is often assumed the borrower bears no responsibility for the loan.
However, this is not the case. In the unlikely event that the borrower is unable to repay the loan, the guarantor has to repay the loan. However, defaulting on repayments can still harm the borrower’s credit history. This can make it more difficult for the borrower to obtain finance in the future.
Missing the payments is not advisable. While a lot of guarantor loan companies advertise the fact that there are ‘no late payment fees’, this can actually be misleading. In many cases, if you miss a payment then the amount of interest will actually increase, meaning you will have to pay more back in the long term.
Are guarantor loans safe for the guarantor?
A guarantor is a person that is required to co-sign the loan with the borrower. Because the borrower has a poor credit rating, the guarantor is usually required to have a good credit rating.
Guarantor loans only become unsafe for the guarantor if they are not fully aware of the risks that are involved in being a guarantor.
If you’re a borrower, it is important that you fully explain to your choice of guarantor the risks that are at hand for them. Even if you do not intend to stop repaying the loan, the guarantor should still be aware that if you do, they are responsible for repaying the loan.
It’s also a good idea to inform the guarantor that their credit history will be checked. Some companies use a ‘soft search’ to do this, meaning that there is no mark left on their record. However, some guarantor loan companies do a ‘hard search’, which does leave a mark. So informing them that this will happen is helpful.
What if the borrower stops repaying their loan?
If you’ve been asked to be a guarantor, you need to fully read up on what could happen if the borrower stops repaying their loan. Make sure that you have all the facts you need before you sign that dotted line.
Before signing, you should ask yourself; will this person be able to afford these repayments, and pay them on time? Yet, if the answer is no, you shouldn’t agree to be their guarantor.
If the borrower stops paying their loan back for any reason, as their guarantor you will be responsible for the complete repayment of the loan. This includes any interest accrued over the time that the loan has been taken out.
There could be any reason that a borrower fails to repay their loan. So it’s also a good idea to know the borrower beforehand. Close relationships between borrowers and guarantors are ideal.
To give you additional peace of mind, why not ask the borrower to keep you in the loop about their finances? That way, if the borrower does default on their loan payments, the guarantor will know.
How a guarantor loan can affect your credit history
As a guarantor, you should know that your credit history can be affected by a guarantor loan. As a guarantor co-signs the loan, they’re tied to the loan. Unfortunately, if the borrower repays all their loan repayments on time, the guarantor’s credit history will not improve.
The guarantor’s credit history will not be affected unless both the borrower and guarantor refuse to repay the loan. Should this happen, the lender will usually take court action to reclaim the money owed. If both the guarantor and borrower still refuse to pay, then the guarantor’s credit file will be left with a record.
If the legal case results in a county court judgment, it will be applied to both the borrower and the guarantor. This makes it all the more important to make sure that you are fully aware of the financial agreement you are entering into. A CCJ can seriously affect your finance options, so make sure that you feel comfortable entering into a guarantor loan if you feel comfortable doing so.
Overall, a guarantor loan is a perfectly legitimate way to help someone with a poor credit rating get the finance they need. There is a financial risk involved, especially if you are a guarantor. However, the level of risk is no higher than it would be from a regular bank loan.
A guarantor loan is still a legally binding financial agreement, and should not be entered into lightly. Failing to repay your guarantor loan can cause serious financial problems for you in the long term.