Guarantor loans are a fairly old fashioned type of loan which has made a recent resurgence because of the fact that they are available to borrowers who have a poor credit rating. As the ability to successfully apply for a loan with a bank or building society has begun to subside, the popularity of guarantor loans rapidly simply down to the fact that they are a viable and affordable option.
What is a Guarantor?
The crucial factor regarding the application for a guarantor loan is the presence of the loan ‘guarantor’. The guarantor is a third party in the loan application who will guarantee to make the repayments should the borrower have difficulty doing so.
Why Would I Want to Be a Guarantor?
If everything goes to plan, the guarantor for the loan will not have to do anything after signing the loan agreement. If however, things go a little wrong, they will ultimately be responsible for paying the outstanding balance of the loan. Whilst hopefully this will not happen, for a loan seemingly fraught with danger, why would anyone choose to put themselves in this position?
Reason No. 1 – Helping out a Friend
Many people out there like to help out their friends wherever possible. The chances are that if someone has chosen to apply for a guarantor loan, it is because other more traditional options are not available to them. By agreeing to become a loan guarantor for a friend, you will be helping them to receive a financial lifeline that could make a significant difference to them.
Reason No. 2 – Finances not available
As much as we all like to help out friends and family wherever possible, especially where money is concerned the will to help and the ability to help do not always come hand in hand. If you would love to give someone close a loan to help them through troubled times but do not have the disposable funds to do this, helping them out by stepping in to be their guarantor can offer the ideal alternative. Essentially you will be lending them the money, without actually lending them the money!!
Reason No. 3 – Helping to Build a Credit Rating
One of the main reasons people find their loan application has been turned down is because their credit rating will have been deemed too low to help offset the risk to the lender. If someone falls into the bad credit rating category it can prove to be a very difficult situation to turn around. Where stepping in to act as a guarantor can help, is you will be giving the borrower the opportunity to demonstrate their ability to make scheduled repayments on time and in full. It is this demonstration of creditworthiness that can help to turn a credit rating around. As their credit rating begins to improve, there is every chance that they will find other financial options become available to them in the future.
A Brighter Future
If you are considering being a guarantor for someone, so long as you have done the appropriate amount of homework and are comfortable with the role you will be fulfilling, you will have a genuine chance to make a difference to their financial future.
Amanda Gillam is Solution Loans's General Manager and has been since 2009. She is also a prolific writer on personal finance issues, and has been quoted numerous times in articles published on 3rd party websites and in press releases. Her...Read more about Amanda Gillam