Guarantor loans are a type of loan which can be taken out by anyone, even if they have a poor credit score. The fact that there is a guarantor who will make any of the payments that the borrower cannot make, will mean that there is less risk for a lender and they will be more willing to lend. These loans tend to be for larger amounts of money more than a thousand dollars. Deciding whether this is the right loan for you can be tricky. It is worth understanding how they work and then considering the advantages and disadvantages.
How do guarantor loans work?
A guarantor loan is for borrowers who have a poor credit record. In order to lower the risk, the lender will lend them a significant amount of money, usually thousands of dollars, as long as they nominate a guarantor who will be responsible for the repayments if the borrower cannot cope with them. Payments are taken by direct debit as normal but if there is no money available then the guarantor has to pay it instead. They are often the only borrowing option available for someone with a poor credit score that wants to borrow a significant sum of money.
Advantages of guarantor loans
A guarantor loan will enable someone who cannot borrow money by other means to be able to borrow. This can be really useful if they need something desperately, perhaps a repair a repair on their home, a car to get them to work or a training course to improve their career prospects. Having access to money like this can really help to open up opportunities that would not have otherwise been there.
Disadvantages of guarantor loans
The first hurdle with a guarantor loan is that you have to find someone who is willing to be a guarantor for you. You will need to find something that is close to you and therefore willing to help you and who has a good credit score – as the lender will check. You will need to think carefully about the person that you are considering. Think about how it might affect your relationship with them if you rely on them like this and also think about what might happen if you do miss a repayment and they have to pay. It can be really tempting to just assume that you will be able to make the repayments and is this is not something that you will need to worry about, but you need to think about what might happen if you cannot. Discuss this with them as you might have the expectation that they will just pay it for you but they might expect you to repay them as soon as you can. This can lead to problems between you, especially if they suddenly need money and you cannot afford to repay them, so make sure that you have a written agreement so that you can refer back to it if you disagree about this sort of thing.
Even though you have a guarantor, the lender is still taking a risk lending to you as you have a poor credit score. It will cost them to try to take money from you and then to try to take it for your guarantor and it will also cost them more to set up the account because they will have to check out both of you. This means that this type of loan can be quite expensive compared to other loans, which require a good credit score, that offer this sort of money. It is worth looking at how much it costs and thinking about whether you think that it still offers good value for money or if you think that it is worth paying that extra cost for whatever it is that the loan is for.
All debts also come with risk. There is a risk that you will not be able to repay the loan. Although you have a guarantor to repay it for you, that is unlikely to be a situation that you want to be in. You will also find that you credit score will get even worse if you do not make all of the repayments. It is therefore well worth finding out how much you will be expected to repay so that you will be able to see if it is an amount that you can afford. You may be able to choose between loans and find one that has a lower repayment amount if you think that this will help you. You are likely to have to pay more for a loan with lower repayments as you will have to repay it over a longer period, but it can be worth it if It means that you will more easily be able to manage.