Representative Example: Borrow £4,000 and pay back your loan over 36 months. Monthly payments of £194.78.
Total amount repayable is £7,012.08. Interest payable is £3,012.08. APR of 49.7%. Interest rate of 41%. Fixed rate.
What is a guarantor loan?
A guarantor loan is a type of unsecured loan where somebody else supports the application, and takes responsibility for the debt if the main borrower are unable to meet their repayment commitments.
Say you are struggling to get a loan in your name due to poor credit or perhaps a thin credit file. The reason you are finding it difficult is because lenders are assessing you as “high risk”. By providing a guarantor the lender risk is offset and they are a lot more likely to lend to you.
If you would like anymore information on how a guarantor loan works one of our loan experts would be happy to talk you through it.
How does a guarantor loan work?
A guarantor loan works by offsetting the risk of lending to someone with a bad credit history with the help of a friend or family member acting as guarantor. Because their is an additional party involved, the application process is slightly different (and longer) compared to no guarantor loans.
Here are the basic steps for applying for a guarantor loan:
- The main borrower starts an application and enters their basic details along with some income and expenditure information.
- The guarantor then enters their details into the application form (this does not have to be done at the same time as the main applicant).
- Once both borrower and guarantor have entered their details one of our loan experts will call up to confirm the details are correct.
- We will then find you a suitable guarantor loan provider based on yours and your guarantors current situation.
- Once we have identified a suitable lender for you both, your details are passed over to the lender who will run all of their credit searches and affordability assessments.
- If they lender approves you, they will generally speak to both the main applicant and the guarantor – and in some cases request some documentation to confirm some of your details. An example of this could be providing a photo of a payslip to prove your income.
- If the lender can’t help, we will find you an alternative lender and the process repeats.
- If all goes well, the money will be paid into the guarantor’s bank account. The guarantor then transfers the money into the main applicants bank account. It is done like this so the guarantor is fully aware the money has been paid out and their responsibility has begun.
Are guarantor loans a good idea?
Guarantor loans are a double edged sword, just like any type of borrowing, and there are many things you should take into account before taking one out.
Do you need to borrow the money?
Do you really need to borrow the money? Can you save? Or wait a month? If you do and are looking to borrow a fixed sum of money and pay it back over a period of up to 5 years then a guarantor loan could be an ideal option.
Can you afford the repayments?
The most important thing to take into consideration when taking out a loan is that you can afford the monthly repayments. This should mean that you have enough spare disposable income every month to make the payment and you do not believe your circumstances will change throughout the loan term (which could be from 12 months up to 5 years).
Is the guarantor happy to step in if anything goes wrong?
The guarantor is legally obligated to step in and make payments on the main applicants behalf if they are unable to. It is important the guarantor understands this and is happy to help if things go wrong.
At the end of the day it is up to you and your guarantor to decide whether or not a guarantor loan is a suitable option. If you need any more information on how guarantor loans work or how much the repayments would be you can speak to one of our loan experts who will be happy to help.
Can guarantor loans be written off?
Having a guarantor on the loan means that if you go into a debt management plan, individual voluntary arrangement (IVA) or in extreme cases go bankrupt the guarantor will still be liable for the outstanding loan balance. It is not written off by the lender.
This means that if you do find yourself in one of the situations mentioned above you may want to consider continuing your guarantor loan repayments so that your guarantor does not have to take full responsibility.
In the case that you physically can’t repay the debt, then the guarantor will need to step in and help out. If the guarantor finds themselves in a situation where they are also in one of the positions above then the lender will make a decision on how best to proceed.
Why are guarantor loans expensive?
In the grand scheme of things, guarantor loans sit in the middle when it comes interest charged. They can be, for example, a lot more cost effective than a bank overdraft or a short term instalment loan with interest rates in the hundreds or even thousands – as the interest charged is a lot lower. Then again they can be a lot more expensive than a bank loan or similar with rates from around 3%.
When explaining what a guarantor loan is it was explained that a guarantor helps limit the risk to the lender. Another way they limit the risk is to charge an interest rate that will offset the possibility of the money not being repaid. All lenders experience “bad debt” and the interest charged will often reflect the chances of this happening.
A great way to limit the expense of a guarantor loan is to only borrow the amount you actually need over a short length of time. This means you can keep your repayments affordable and ensure you are not being charged a large amount of interest over the life of the loan.
Which lenders offer guarantor loans?
A number of lenders now offer guarantor loans. We work with the following to find you the best option depending on your circumstances.
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Representative Example: Borrow £4,000 over 36 months. Monthly repayment of £194.78. Total repayable is £7012.08. Interest payable is £3012.08. Fixed APR of 49.7%. Interest rate of 41% per annum. Representative APR 49.7% (fixed).
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