How guarantor loans work

How guarantor loans work
February 16, 2017 Cash Lady

How guarantor loans work

guarantor
ɡar(ə)nˈtɔː/
noun
a person or thing that gives or acts as a guarantee.

At CashLady, we want to help you understand all aspects of financial lending, not just cash loans. So we’re back with another part in our series on guarantor loans. We’re talking about what guarantor loans are, how they work and how you can get one.

A guarantor loan is typically for people who have a poor credit rating. This can be due to a variety of factors. It can be that they’ve missed a few payments over their lifetime, but it could also be due to the fact that they have not yet built up a credit rating.

The fact that a borrower has a poor credit rating, or if you hasn’t built one up yet, can lead to them being rejected by financial institutions. Typically, lenders need good credit ratings to agree to a loan. This can seem unfair, especially if you have a decent income and can afford the repayments.

However, a guarantor loan means that you can overcome your credit score and still get the finance that you need.

How guarantor loans work

To overcome the difficulty of having a poor credit rating, a guarantor loan requires that a guarantor co-signs for the loan on the behalf of a borrower. The guarantor must have full consent before signing the loan and it is important that they understand what the loan requires them to do. If the borrower defaults on the loan, the guarantor is required to cover the loan on the borrower’s behalf.

Guarantor loans have become a more popular choice amongst lenders. This is due to the increased financial requirements for borrowers.

After the 2008 financial crash, which was largely caused by sub-prime borrowing. This meant that financial lenders became warier of borrowers’ financial histories and credit scores.

This meant that they stopped lending to borrowers with a less than stellar credit rating. So there became a need for a financial lending model that helped those with bad or poor credit ratings get the finance that they need.

Guarantor loans work because the lender will look at the credit rating of the guarantor, rather than the borrower. By having a guarantor with a good credit history, lenders feel that the borrower poses significantly less risk to them. If the borrower defaults on their payments, the guarantor will pay them instead.

Typically, guarantor loans will be used for a smaller amount – up to around £15,000 from most lenders. These small loan amounts are typical because the loan will be unsecured against property or any collateral.

How do you choose a guarantor?

When choosing a guarantor, is it important that you choose someone that you trust. You should have a close relationship with your guarantor, as they’ll need to understand your financial situation. Typically, guarantors are family members, although they can also be spouses, although they can also be friends or colleagues.

Before getting your guarantor to agree to co-sign your loan, you’ll need to make sure that they are aware of the financial implications of becoming a guarantor. It is imperative that they know that if the borrower fails to make the repayments, they will have to pay the repayments instead.

The only necessary requirement for someone to be a guarantor is that they have a good credit rating. Some lenders will require that the guarantor is a homeowner as well. It is important that your guarantor has a good credit rating to prove that they are financially responsible and that they will be able to shoulder the burden if you are unable to continue repaying your loan.

A guarantor with a good credit rating shows the lender that are a smaller risk and, as such, are far more likely to be accepted by lenders and therefore get you the financial agreement that you need.

It is important to notify your guarantor that a credit check will, in most cases, be done on them.

Using a guarantor loan to build your credit rating

Those who take our guarantor loans usually have poor to bad credit ratings, leaving them unable to get a regular loan from a financial institution. The use of a guarantor loan, however, can cause your credit rating to increase.

Using a guarantor loan to build your credit rating

As long as you repay your guarantor loan on time, you can boost your credit rating. By repaying a loan on time, this adds to your credit rating and helps prove that you can manage your repayments. This will then allow you to take out a regular loan further down the line, as banks will see your increased credit rating and classify you as less of a lending risk.

You may find that your guarantor is able to lend you the money that you need. By giving you the chance to take out a guarantor loan, banks are helping you to rebuild your credit score. This means that there will be a better choice of lenders further down the road.

By rebuilding your credit score, you may find that other options are also available to you further down the line. This can be especially handy when it comes to getting a larger loan, for example, a mortgage.

Overall

A guarantor loan is a great way to get the finance you need, especially if you are suffering with poor or bad credit. The key is to find a guarantor who understands your financial situation and is willing to help you out.

Guarantor loans can be a great way to secure a better financial future for yourself. By using one to consolidate your debts and repaying on time, you can rebuild your credit score and unlock better financial prospects moving forward.

Still got a few questions? Leave a comment below, or you can always find us on Facebook or Twitter. If you need finance to help you out in a bad situation and you have poor credit, why not consider an online loan from Cash Lady?