What does guaranteeing a loan mean for the borrower and the guarantor? This guide will take you through the ins and outs of guarantor personal loans, the benefits available to borrowers and how to avoid some common pitfalls.
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Lenders use a number of factors (such as your credit score, the amount of time you have worked for your current employer, etc.) to help determine which applicants would present the least risk. If you don’t meet one of these requirements, you might not get approved for a loan despite it being perfectly affordable for you. In such a situation, you could consider enlisting the help of a family member or a close friend to act as a guarantor.
When you ask someone to guarantee your loan, you are asking them to take on your debt if you default on your loan. If you agree to go guarantor on someone’s loan, you become legally responsible for the debt if they become unable to manage their repayments. Crucially, acting as a guarantor does not mean “putting in a good word” for somebody or providing a reference. You are volunteering to repay the loan in full (plus any interest and fees) if the borrower doesn’t.
If you are a guarantor and you apply for further credit of your own, you may need to declare the guarantee on your application.
The guarantor’s credit rating should not be affected unless the borrower defaults and the guarantor then fails to meet a repayment. However, if the guarantor applies for a mortgage, for example, the size of a mortgage they could get might be affected by the guarantor loan, since they could find themselves responsible for that debt at any time.
When it comes to comparing guarantor loans, there are some key features to look for. Look at each loan’s features and costs before deciding which one suits your needs.
Some lenders divide their loans into 2 categories – either for homeowner guarantors or non-homeowner guarantors. The term “non-homeowner” refers to the residential status of the guarantor, not the applicant (borrower).
Non-homeowner or tenant guarantor loans usually have a higher interest rate than homeowner guarantor loans, because of the perceived increased risk to the lender and the complication of involving a guarantor.
These are the typical steps that an application for a guarantor loan will go through:
Criteria will vary from lender to lender, but as a minimum, you should expect that the guarantor must meet the following criteria:
Not every personal loan is a “guarantor” personal loan. Using a guarantor is a feature offered by some specialist lenders, including those listed above.
What documents do you need to open a personal loan?
If you’re a co-borrower, you are listed on the loan as a borrower and are jointly liable for the debt. If you are a guarantor, you only become responsible for the debt when the borrower defaults on the loan.
When you’re comparing guarantor loans, it won’t be long before you’ll come across the Annual Percentage Rate (APR). This figure is designed to provide an annual summary of the cost of a loan, taking into account both interest and any unavoidable fees (for example, an arrangement fee) over the duration of a loan.
All lenders must calculate the APR of their products in the same way, and must tell you the APR before you sign an agreement. So, for consumers, it can be a handy tool for comparison.
There’s a big catch, however. Almost all lenders tailor their interest rates to the individual applicant – so where they think there’s a greater chance of not getting their money back, they’ll offer a higher interest rate. The representative APR is the APR that the lender realistically expects at least 51% of its borrowers to receive.
Many guarantor lenders have chosen to split out the loans they offer into loans where the guarantor is a homeowner and loans where the guarantor isn’t a homeowner. As such, you’ll sometimes see 2 different representative APRs for the same loan company, for example, UK Credit and TrustTwo.
Whilst guarantor loans may enable you the ability to borrow if you’re struggling to get a personal loan, you should only apply for one if you’re certain you or your guarantor will be able to meet the repayments.
If you’re applying to act as a guarantor, the decision shouldn’t be taken lightly. Should the guarantee be unable to make repayments, you would then be liable until the loan, plus any interest, is paid off. You should look into it thoroughly before deciding.
We sat down with the UK’s biggest guarantor lender to learn where applications can fall down.
Finder’s tips to find the cheapest guarantor loans.
Find out who you can ask to be a guarantor for a personal loan. Compare providers and apply online.
How to secure a guarantor loan the same day. Compare live rates, fees and eligibility criteria and apply online.
Find out which UK lenders offer guarantor loans for homeowners and non-homeowners. Compare and find out how to apply.
Looking for a homeowner guarantor loan? Learn all you need to know about how they work, lending criteria and how to apply online.
Looking for a non-homeowner or tenant guarantor loan? Learn all you need to know about how they work, lending criteria and how to apply online.
