A guarantor loan is a type of unsecured loan that requires a third party to co-sign the credit agreement. This third party is called a guarantor, because they are guaranteeing repayments on the loan will be met. They act, essentially, as underwriters to the loan, ensuring that they will cover the costs if the person taking out the loan fails to pay their instalments. People who have had to sign tenancy agreements in which references alone aren’t enough to satisfy the landlord may be familiar with the concept of a guarantor. The guarantor effectively provides additional security – in this case, on the loan.
Many young people have no credit history at all. They find it almost impossible to take out a loan, because of the strict restrictions of a traditional loan’s rules and criteria for eligibility. Furthermore, people who may have had a less than desirable credit history in the past might find it difficult to secure loans. A guarantor loan can be a great alternative to the above, allowing people to take out loans with the help of a third party. You may be in need of a break with your credit score and know someone who would be willing to act as a guarantor on a loan. Instead of asking this person to lend you money from their pocket, you could ask them to act as a guarantor.
In most cases, family members act as guarantors. A guarantor must have a good credit rating. Parents who might want to see their young adult children take out a loan to get used to the loan market might be happy to act as guarantors. It is a good alternative to lending money out of one’s pocket as well. A recent graduate, for instance, might need a car loan, but the traditional channels are too draconian with their strict regulations. Alternatively, someone might want to complete a training course to improve their career, but they are finding it difficult to come up with the fee upfront. Their parents might then step in and co-sign the credit agreement instead of forking out a lot of money from their own accounts. Friends are also happy to act as guarantors sometimes, happy to help their friend secure a loan which will get their credit rating back on track.
While most people would love to act as a guarantor to a friend or family member, it is important that they realise and understand they will be held liable if the person taking out the loan is unable to pay back their instalments. This seems like a heavy responsibility, but in most cases the people taking out guarantor loans are easily able to repay their loans. They just can’t seem to secure a traditional loan because they had a poor credit rating in the past or they have no credit rating at all. As with all loans, there are risks involved. If the loanee is employed and suddenly finds themselves out of a job, then they might be unable to meet payments. This is when a guarantor comes into play. Otherwise, if the person securing the loan is prompt and responsible with repayments, the guarantor will not be involved in any stage of the loan process.