A Beginners Guide To Guarantor Loans

Amanda Gillam
23rd January, 2015
Guarantor Loans

A loan with a guarantor offers a credible solution for anyone who has either a poor credit rating or no credit rating who would like to secure a loan. Whilst there is a variety of ‘bad credit loans’ available within the UK today, many of these loans have extremely high APRs and can often lead to more financial difficulties than they solve. The guarantor loan though enables customers, who have a good character and willingness to pay, the opportunity to raise a loan should they need one without having to risk their financial future to do it.

Read: Our Guide to Guarantor Loans

Why Were Guarantor Loans Created?

It is not without irony that given the current financial climate, many of the people who most need credit are the ones who are least likely to get it. Until fairly recently, if borrowers with a poor credit history were lucky enough to secure a loan, they would more than likely be charged a higher rate for the privilege. The creation of the guarantor loan has helped to level the playing field for borrowers. Many UK based lenders moved towards targeting asset-backed finance to give themselves increased levels of security against the balance of the loan and guarantor loans could be viewed in a similar vein. Rather than having to offer security against the loan, the guarantor loan uses the presence of someone who will step in to make repayments should the borrower fail to do so. This significantly reduces the risk posed to the lender and as such, ensures the loan is available at much-reduced interest rates when compared to other bad credit loans.

What Type of Customer will Benefit from a Guarantor Loans?

Borrowers who have a lower credit score, regardless of the reason, are perceived to be a higher risk to banks and finance houses due to the fact that lenders are reluctant or unwilling to take on this type of financial liability. The applicants are simply rejected and the customer left with few options other than to perhaps consider a guarantor backed facility. By applying for a guarantor loan the borrower is effectively ‘guaranteeing’ that their loan will be repaid to the lender. The lender is able to protect their exposure by allowing a guarantor to co-sign the loan agreement to ensure that if the borrower fails to repay the loan as agreed, the lender can then pursue the guarantor for the outstanding balance. This offers a way of mitigating their potential losses and allows them to lend money to those who normally wouldn’t qualify for such services.

Is There Anything Else That I Should Know?

Guarantor loans have not been designed for borrowers who do not have a genuine intent to improve their financial situation. Similar to applying for a job and not being able to supply character references, guarantor loans will only ultimately be helpful to a customer who can find someone who is deemed a secure and responsible individual to stand guarantor to the loan and has a genuine intention to repay it themselves.

What about finding a Guarantor?

The guarantor for the loan is ultimately responsible for the payments should the applicant default. Because of this, your guarantor is likely to be someone related to the applicant, a close friend or possibly in some cases an employer or landlord. They also need to be in receipt of a regular income and preferably a homeowner (though loans are available where the guarantor is a non-homeowner).

More information about guarantor loans and other financial products is available at Solution Loans.