It’s said that at least 50% of those living in the UK are on a financial edge and worried about money. So, it comes as no surprise why more people are choosing to take out guarantor loans to supplement their income. But are they a good financial option? And, what’s involved when applying for such a loan?
So, during this article, we would like to help you understand what guarantor loans are and whether they’re a viable option for those with a poor credit score.
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The Process
When opting for a guarantor loan, a guarantor is needed to sign the financial agreement with the borrower. This gives the lender an extra layer of security. They’ll be aware that while the borrower has a poor credit score, the guarantor won’t, so if the borrower fails to repay the loan, the guarantor will pay instead.
If you’re thinking about applying for a guarantor loan, it’s very important that you understand all of the facts. It doesn’t matter whether you’re the borrower or guarantor, you need to understand the agreement that you’re entering into and more importantly, be comfortable with doing so.
If a borrower asks you to be their guarantor, you will be responsible for repaying the money, should the borrower default on their payments. But are they actually safe for both parties involved? Let’s take a look.
Are They Safe for a Guarantor?
Because a borrower will have a poor credit score, a guarantor will be required to have a good credit score. Guarantor loans become unsafe for a guarantor if they’re not aware of the risks involved. If you’re a borrower, it’s just as important for you to explain the risks to your chosen guarantor. Even if you think that you’re going to be able to repay the entire loan, they should still be aware that if you can’t, it’s their responsibility to pay it on your behalf.
You’re also going to want to let your guarantor know that they’ll be credit checked at some point during the application process.
Are They Safe for a Borrower?
Because a guarantor takes the final responsibility of repaying the loan, it’s often assumed that the borrower has little responsibility or risks themselves. However, this really isn’t the case at all. Even if a borrower defaults on their payments and the guarantor has to pay instead, this will still have a negative effect on the borrower’s credit score.
In other words, this can further harm the borrower and make it more difficult for them to secure a financial product in the future.
As a borrower, we must stress that missing a payment is not advisable. There are many guarantor loan companies that advertise no late payments fees, and this is very misleading. In many cases, if you miss one of your repayments, then the amount of interest that you pay on the entire loan will go up. This, in turn, means that you will have to pay back more money in the long-term.
How Can a Guarantor Loan Affect Credit Score?
As a guarantor, it’s especially important to be aware that your credit score can be affected by this type of loan. And, unfortunately, even if the borrower makes all of your repayments in full and on time, your credit score isn’t going to improve.
A guarantor’s credit score will only be affected if both the borrower and themselves refuse to make the repayments. Should this occur, the lender will normally take legal action via a court in an attempt to claim the loan.
The Bottom Line
A guarantor loan is a good way to help someone struggling with money get the relief they need. Obviously, there’s a level of risk involved as it’s a financial product, but this risk is no higher than your average bank loan. The most important thing to do is for the borrower and the guarantor to do their research to make sure they’re perfectly comfortable with entering the agreement together.