When applying for a loan, especially if you have a poor credit score or a limited credit history, getting approved can be challenging. One option that might help is having a loan guarantor. But what exactly is a loan guarantor, and how can they help you get the loan you need?
In this article, we’ll explain everything you need to know about loan guarantors, including how they work, who can act as one, and the benefits and risks involved.
What is a Loan Guarantor?
A loan guarantor is someone who agrees to take responsibility for repaying your loan if you fail to do so. Essentially, they act as a safety net for the lender. If you miss a payment or default on the loan, the lender can seek repayment from the guarantor.
Guarantors are often required for individuals who may be considered high-risk borrowers, such as those with poor credit scores, those with no credit history, or first-time borrowers. Having a guarantor can give lenders more confidence that the loan will be repaid, increasing the chances of getting approved.
How Does a Loan Guarantor Work?
When applying for a loan with a guarantor, the lender will assess both your creditworthiness and the guarantor’s financial situation. Here’s how it typically works:
Guarantor’s Role: The guarantor provides assurance to the lender that if you’re unable to make the loan repayments, they will step in and cover the cost.
Credit Check for Guarantor: Lenders will usually perform a credit check on the guarantor to ensure they have the financial means to repay the loan if necessary.
Agreement Terms: The guarantor signs an agreement outlining their responsibility. It’s important that both the borrower and guarantor understand the risks involved, as the guarantor will be held liable if the borrower defaults.
Who Can Be a Loan Guarantor?
A loan guarantor can be anyone who meets the lender’s requirements, though they are usually someone who trusts the borrower. Common examples of loan guarantors include:
Family members: Parents, siblings, or even grandparents often act as guarantors for children or younger relatives who are trying to secure a loan.
Close friends: A close friend who is willing to help may also act as a guarantor, although this can strain relationships if the borrower fails to repay.
Employers or colleagues: In some cases, employers or colleagues may agree to act as guarantors, although this is less common.
Why Would You Need a Loan Guarantor?
There are several situations where a loan guarantor may be necessary:
Poor credit history: If you have a poor credit score, lenders may see you as a higher risk. A guarantor can provide additional security for the lender, making them more likely to approve your loan.
Limited credit history: If you’re a first-time borrower with no credit history, lenders may not be willing to lend to you. A guarantor with a solid credit history can help mitigate that risk.
Large loans: For larger loans, such as a mortgage or car loan, lenders may require a guarantor to ensure the loan is repaid in full, especially if the borrower has a limited or poor credit history.
What Are the Benefits of Having a Loan Guarantor?
There are several advantages to having a loan guarantor:
Increased chances of approval: Having a guarantor can greatly increase your chances of getting approved for a loan, especially if you’ve been declined before due to poor credit or limited history.
Better loan terms: If the guarantor has a strong credit history, you may be able to access better loan terms, such as lower interest rates or more favourable repayment schedules.
Access to larger loans: With a guarantor, lenders may be willing to lend larger sums of money than they would if you applied alone.
What Are the Risks of Being a Loan Guarantor?
While a loan guarantor can help the borrower get approved for a loan, it’s important to understand the risks:
Financial liability: The guarantor is financially responsible for repaying the loan if the borrower defaults. This can have serious consequences if the borrower cannot make the repayments.
Impact on credit: If the borrower fails to repay the loan, the guarantor’s credit score may be negatively affected, as the lender may report missed payments or defaults to credit agencies.
Strained relationships: If the borrower defaults, it can cause significant tension between the borrower and the guarantor, especially if the guarantor struggles to meet the repayment terms themselves.
How Can a Loan Guarantor Help Improve Your Credit Score?
If you have a loan guarantor, it may indirectly help you improve your credit score. By ensuring the loan is repaid on time, your credit history will improve, making it easier to qualify for credit in the future. However, it’s important to ensure you meet your repayment terms, as any missed payments will still reflect on your credit history.
Alternatives to Using a Loan Guarantor
If you don’t have a guarantor or prefer not to involve someone else, there are alternatives available:
Secured loans: If you own a property or have valuable assets, you may be able to apply for a secured loan, where your property or assets are used as collateral.
Joint loans: You could apply for a joint loan with someone who shares the responsibility for repayments. This could be a spouse, partner, or family member.
Building your credit: By improving your credit score through responsible borrowing and repayment, you can qualify for loans without the need for a guarantor.
Final Thoughts
A loan guarantor can be a useful tool for securing a loan, especially if you have poor or limited credit history. However, both the borrower and the guarantor should fully understand the risks involved, as the guarantor is financially liable if the borrower defaults.
If you’re considering applying for a loan with a guarantor, make sure to compare loan options and terms to find the best deal for your needs. Use comparison websites like Compare the Market or MoneySuperMarket to get quotes from different lenders and find a loan with the most favourable terms.
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