Even as you read this, lenders in the UK are actively promoting no guarantor loans that don’t require a co-signer. Not to say it’s bad, but for some long-term loans, guarantor loans might be a much better and safer option. As it involves a long-term commitment, it may so happen that you’re unable to keep up with loan repayments. So, what are they and how do they work? Is it really suitable for me? Come with us on our financial journey and discover it for yourself!
What Are Guarantor Loans?
Loans that need a guarantor are guarantor loans. Simple, isn’t it? Now, to speak of who’s a guarantor, it can be a spouse, parent, relative or close friend who can afford to repay your loan on your behalf if you fall behind. It’s a type of unsecured loan and lenders don’t usually ask for collateral.
How Can I Get Guarantor Loans?
All you have to do is to convince a friend or family member to act as your guarantor and then approach a lender with a loan request. Make sure that they’ll be able to afford the repayments. And under no circumstances should you compel them to be your guarantor! If you’re having trouble finding a person to have your back, go for no guarantor loans.
How Do Guarantor Loans Work?
Guarantor loans work in the same way as a normal personal loan. The only difference lies in the fact that if you don’t make repayments, the lender will contact your guarantor for their money. These types of loans have the following features:
- They carry a repayment period from one to five years
- Borrowing amount can be between £1,000 and £10,000
- You’ll pay interest on guarantor loans
- Repayments are usually spread out over the term of the loan and remain fixed
Why Do I Need A Guarantor?
Having a guarantor provides a safety net to the lender and makes it less risky for them to lend to you. That’s because they have a back-up if you fail to meet repayments. If you have bad credit or are borrowing for the first time, lenders may refuse no guarantor loans. So, guarantor loans are a better alternative.
Who Can Be a Guarantor for Guarantor Loans?
Here too, there are certain terms and conditions about who can become a guarantor for guarantor loans. Some UK lenders have strict requirements while others are more flexible with their policies. On the whole, a guarantor should:
- Be over 18 or 21 years of age
- Have a strong credit record, possibly free from blemishes
- Not financially dependent on the borrower e.g. stay-at-home spouse
- Employed full-time
- Be a homeowner
How Much Do Guarantor Loans Cost?
As guarantor loans are unsecured loans, they come with high rates of borrowing but rather cheaper because of a guarantor. They’re designed for people who have a poor credit record. Your chances of being accepted for a loan are quite high with guarantor loans. At the moment, the cost of borrowing lies between 11.2% and 50% APR. Remember that lenders are obliged to give APR rates only to 51% of their guarantor loans borrowers. Therefore, you should shop for the lowest rates before saying yes to a particular deal.
A guarantor loan of £5,000 taken for a period of 3 years at 15% APR will cost around
Monthly payments- £171.0
Total repayment- £6,157
A good way to do this calculation on your own with little effort is by using a loan calculator. You can compare different guarantor loans deals by moving the slider on how much you want to borrow, for how long and at what APR.
How Do I Select the Right Guarantor Loans?
Only you can select the right guarantor loans for your needs. Accordingly, these three factors might help:
- How much you need to borrow:
This depends on what you want the money for. Some lenders lend only upto a certain amount, while others have no such limits. Be sure to borrow an amount approximately equal to a realistic estimate of your expenses. A higher or lower amount of guarantor loans may both pose a problem.
- How long you’ll need to repay:
Different individuals have different incomes and affordability. So, a one-year repayment may be okay for an individual and unrealistic for another. Work out how many pounds you can comfortably put towards your guarantor loan repayments and divide it by the total repayment amount. You’ll have the answer in no time.
- Weed out the unnecessary deals:
There will definitely be a few guarantor loans deals whose criteria you or your guarantor don’t fit. In such cases, exclude them to zoom in on a suitable and affordable deal.
How Do I Apply For Guarantor Loans?
Once you’ve settled on a easy loan deal, you’ll generally have to fill out an application form on the lender’s website. This form includes your and your guarantor’s details. On successful approval from the lender’s side, the money should be paid out within 48 hours. Yet, if it’s a weekend, you live in Scotland or Ireland, or you’re unable to get in touch with your guarantor, the process can get delayed. Some lenders prefer transferring the loan amount to your guarantor’s bank account. The reasons might be for security or to ensure they act as a guarantor on your behalf.
What Are The Risks With Guarantor Loans?
As with any other loan, guarantor loans also possess a few risks. If you’re borrowing such loans, some risks you may face are:
- Risk of Non-repayment:
If you consistently miss repayments on your loan, you risk getting into a debt trap from which it’s not easy to come out unscathed.
- Reduction in Credit Score:
Your credit score is an accurate indicator of your credit behaviour. In case you’re unable to manage the loan, it would reflect on your credit file. This would make it hard to access credit in future.
- Legal action:
If it becomes unaffordable for your guarantor or they wash their hands off their responsibility, both of you may come in for legal action in the form of County Court Judgements (CCJs).
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