Guarantor loans are considered as unsecured and personal types of loans. The borrower has to arrange a guarantor in order to get his or her application processed in order to help lessen the risk to lenders. Unsecured loans are applied for when a borrower has a poor credit history. The recent credit situation in the United Kingdom has prompted several high street banking institutions to shy away from people who have poor credit history. Guarantor loans have been designed exclusively to make sure that credit remains available to people who have credit issues. Credit score does not become a mandatory factor before the borrower applies for a guarantor loan. The interest rates may vary from 49.7% to 49.9% and the repayment period schemes range from three to thirty-six months
Who uses guarantor loans?
Guarantor loan users are generally people who get rejected by all mainstream lenders such as credit card providers and banking institutions when they apply for a loan. This is because they have credit scores that are less than being called perfect. There are close to seven million consumers within the United Kingdom who have been deemed ineligible for bank loans alone as a result of their poor credit score.
Today, various companies that deal in guarantor loans have aimed to position their business as an alternative to payday loans. They are providing these loans at APRs which are lower than those offered by the payday loan providers. However, these lending rates are still much higher than those extended to prime credit consumers who always have a fair access to the mainstream banks.
As a borrower, if you maintain poor credit rating, guarantor loans may become ideal for way as a medium for gaining access to credit for various emergency needs or to help in enhancing your existing credit score. All you need to do is to seek a guarantor who has a decent credit score and one who would be in a position to repay your loan should you default. Usually, such guarantors may be colleagues at work, family members, trusted friends or business associates. These guarantors will co-sign a credit agreement apart from the lenders themselves. You also have to select the repayment tenure. Non-payment of your fixed instalments would have a negative impact on your credit score when you miss your regular payments. The guarantor becomes responsible for filling in for you when you miss the payments for the loan amount.
What do the lenders look for in a guarantor?
The lenders would generally require that the guarantor is above twenty-one years of age. The guarantor also should not be financially linked to the borrower. The guarantor must maintain a good credit score and be a home or a vehicle owner as a resident of the United Kingdom. The home or vehicles, however, are not intended to be used as a security because these types of loans are unsecured loans.
The borrower does not get absolved in any manner whatsoever even if the guarantor pays some of his or her instalments. The borrower and the guarantor are liable jointly and both could be taken to court to recover the outstanding loan amount, when necessary.
It is not easy for a borrower to find a guarantor for the loan he or she is seeking, particularly if there were problems in the past concerning repayment of loans or if there has been a history of non-payment. Guarantors would then consider the loan agreement a risky one. The credit score of the guarantor would also have a negative impact on it if the borrower does not make the agreed repayments and on time.
The guarantor and the borrower may have to go through random credit checks in order for lenders to determine their credit worthiness. The results of such checks may have an impact on the ultimate loan amount that is offered. The human factors weigh more than any other consideration for longer repayment schedules or lower interest rate to be negotiated. Many guarantors insist that there is a written agreement worked out between them and the borrower that lists out the responsibilities of both. The guarantors need to know about the financial status of the borrower at all times during the tenure of the loan so that they become aware of any problems that may arise concerning the loan repayment for them to act accordingly.
When are guarantor loans useful?
Guarantor loans are mostly used to buy property where the borrower or the property purchaser is deemed as a credit risk and would not be able to get an approval for the loan on his or her own. The guarantor becomes a surety for the mortgage repayment if the borrower defaults on the payments.