Over £150m was lent under guarantor loan agreements in 2013, and the market shows no signs of slowing down. But what are guarantor loans?
At CashLady, we want to help you understand all aspects of financial lending, not just cash loans. We’re kicking off a new series that looks specifically at guarantor loans. We’ll be looking at what a guarantor loan is, how it works and whether or not they’re safe.
What are guarantor loans?
A guarantor loan is a type of financial agreement made between three parties. The first is the lender, who gives out the finance needed. The second is the borrower, who needs the finance. The third is the guarantor, who co-signs the loan with the borrower.
As the borrower has poor credit, they are seen as a risk to the lender. To negate the risk to the lender, the guarantor is required. The guarantor is usually required to have a good credit rating, and to be free from CCJs, IVAs or bankruptcy. Guarantors are sometimes required to be homeowners.
By co-signing the loan, the guarantor takes on a responsibility to repay the loan should the borrower fail to do so. This reassures the lender, as they know that the guarantor will repay the loan if the borrower does not.
The fact that only people with bad or poor credit take out guarantor loans is reflected in the interest rate for the loan. If you’re taking out a guarantor loan, you should expect an interest rate of roughly 40 percent.
Guarantor loans are unsecured against property, which means that the amount that can be borrowed cannot be too much. Guarantor loans can be anything up to roughly £15,000.
Who needs a guarantor loan?
Guarantor loans are designed for people who have bad or poor credit. They are a way that people with poor or bad credit can get the finance that they need, without letting their credit history stop them.
Borrowers who are looking to enter a guarantor loan typically do so as their last choice. Because the borrower has poor credit, a guarantor loan may be the only financial agreement available to them.
One of the benefits of taking out a guarantor loan is that if the borrower repays the payments on time, their credit score can actually increase. This is one way that a borrower with poor credit can break out of the cycle of bad credit. By improving their credit score, the borrower can get access to better finance options later on.
Guarantor loans can also sometimes be used as an option for financial consolidation. If a borrower is struggling with a series of high-interest loans, and missing the repayments, this can harm their credit score. By consolidating them into a single guarantor loan, they can get better control of their finances.
How do you repay a guarantor loan?
Guarantor loans are usually made on a monthly basis. As guarantor loans are taken out over the space of several years, the instalments can be quite low. There are typically no fees for paying back a guarantor loan early.
If a repayment is missed, most lenders will keep trying to contact the borrower to collect the payment. Most lenders view contacting the guarantor as a very last attempt. However, the guarantor can have the money automatically collected from them, depending on the contract that was signed with the lender.
If the borrower defaults on a payment, their credit score can be negatively affected. The same can also happen to the guarantor, negatively affecting their credit score too.
What is the history of guarantor loans?
Guarantor loans have become increasingly more and more popular since 2008. This is part in thanks to the 2008 financial crash.
The 2008 financial crash and the recession that followed were due to large proportions of subprime lending. As a result of this, financial lenders have since become warier about lending to consumers with poor or bad credit. To that effect, they have increased the restrictions placed on taking out a loan.
This meant that anyone who did not have a good credit score became ineligible for a bank loan from many high street lenders. This caused guarantor loans to increase in popularity – as people with poor credit still needed loans, but had nowhere to obtain them.
By leveraging the credit score of the guarantor, this gives real credibility to the loan application and reassures lenders that they will get their money back. This type of lending then took off, increasing in popularity ever since.
How guarantor loans are different to payday loans
Guarantor loans are completely different to payday loans. They have many differences, including the duration, loan amount, interest rates and terms.
A payday loan is designed to tide over a borrower until their next payday, hence the name. Payday loans are typically, for that reason, to be paid back up to 45 days later. Payday loans are also designed for emergencies, such as a boiler breaking or car problems.
In contrast, guarantor loans aren’t designed for short-term borrowing. Guarantor loans can be taken out over the course of several years. The interest rate is also a low lower on guarantor loans because the length of time is so long.
The clearest difference between a payday loan and a guarantor loan is that there is no guarantor required for a payday loan. The agreement is purely between the borrower and the lender.
Guarantor loans are a great way that someone with poor credit can get the finance that they need, as long as they have a guarantor who can co-sign the finance agreement. By entering into a guarantor loan, a borrower with poor credit can also start to rebuild their credit score and therefore get better finance options in the future.
Still, need your questions answered? Leave a comment below, or catch us over on Facebook or Twitter. If you need finance to help you out in a bad situation and you have poor credit, why not consider to get a loan with Cash Lady?
⏱Last Updated on