Checking guarantor loans? Don’t miss these aspects while getting one!

If your credit score and income do not qualify for the basic eligibility criteria, guarantor loans may help. These loans involve a third person who may help you get instant approval. It prevents you from attracting high interest costs or defaulting on the loan. However, not getting the right loan may affect your purpose and relationships.

The blog states the aspects to check before qualifying for a guarantor loan. It will help you benefit from the loan offer the most without burdening the third person unnecessarily.

What do you mean by guarantor loans?

Guarantor loans are an unsecured financial facility that involves a third person who guarantees the payment on the borrower’s behalf. It is when the primary borrower fails to or cannot pay the dues. A guarantor can be your family member or a close acquaintance. The guarantor only steps in if a borrower cannot pay. Otherwise, the person is not liable to pay or share the amount dues.

It is ideal for individuals with no credit history, bank account, poor credit, or income. It prevents one from qualifying for any loan at favourable rates. The loan provider analyses the guarantor’s income and credit to approve the loan. The better the financials, the lower the interest rates and terms. It reduces the overall loan costs and helps one share the dues if one cannot pay.

What aspects should you know before seeking guarantor loans?

Understand whether guarantor-based loans are the right choice for you. It is because it may not fit your needs if you don’t have someone to rely on with your finances. Alternatively, if you hold a verified and handsome income, you may get other loans that do not require a guarantor.  Knowing such aspects will help you find one at the right time and for the right purposes. Here are other things to know before getting a guarantor-based loan:

1)      Analyse guarantor eligibility criteria

No, any random person may not qualify as a guarantor on a loan. He must meet some basic requirements to become one. Here is the brief of it:

• Should be above 21 years of age
• Must hold a UK-based bank account
• Host a good credit rating
• Should have a consistent and verified income
• Be financially independent and not linked with accounts

Another important aspect is trust. Unless you can be financially dependent on him for the payments, he may not be the right person.

2)      Impact on the credit scores

The most popular benefit of guarantor loans is that they improve the credit score of individuals involved in the loan agreement. Precisely, well-coordination between the payments and the persons helps boost the credit rating. However, the casual behaviour of the third person may also affect the scores. For example- minor disagreements on the loan term or missed payments due to confusion may not prove ideal. It hampers financial growth and impacts credit growth drastically.

Thus, choose only that person with whom you share a deep bond. For example- if you are a married couple, you can rely on your spouse as a guarantor. It is when she earns decently and hosts a sound credit score. Similarly, analyse the impact of basic disagreements and financial challenges before getting a loan.

• Homeownership requirements

Generally, most guarantor loan providers require the prospective guarantor to be a homeowner. It limits the risk of lending to the prime borrower. Moreover, the person may benefit from high amounts and low interest rates. Check whether the creditor requires the guarantor to be a homeowner. If yes, you must search for the ideal person instead of filing one with your roommate.

Moreover, check the documents required to get a home-ownership guarantor loan. It may include proof of property ownership, mortgage agreements (if any), income proof, etc.

4)      Know the responsibilities of a guarantor

You know that the guarantor must pay the remaining dues if the prime borrower cannot do so. Thus, he must budget for and ensure wise financial management. A fall in the guarantor’s credit score might impact the loan agreement and the interest rates. Thus, a guarantor shares the prime responsibility of maintaining finances well and keeping a safe reserve for the unforeseen. Apart from this, he is responsible for:

• Repaying the arrears that build up on a loan
• Read the terms and understand the loan agreement carefully
• Negotiate on the terms that limit your liabilities
• Maintain detailed records of the aspects related to the loan. It may include financial bank statements, amounts paid on the borrower’s behalf, etc.

Generally, a guarantor cannot back out once he commits to the agreement. If he does, it may affect the credit score of both the parties involved. Moreover, the prime borrower would be responsible for paying the dues alone in that case.  If the borrower cannot pay, the loan enters the default.  The creditor may file CCJ against both the parties. This gets recorded and stays on the credit report for 6 years.

5)      The lender deposits money in the guarantor’s account

The borrower must file a basic form stating the loan purpose, amount needed and guarantor help. One can get these loans for any valid purpose, as these are also known as personal loans, respectively. You may use it to buy a car or meet urgent university requirements.

The loan provider conducts some basic checks after ensuring both the borrower and guarantor understand the terms. He considers both the borrower’s and the guarantor’s finances before proceeding. Undoubtedly, the guarantor should have a strong financial position to back up the loan.

• Guarantor’s leave from the agreement

No, a guarantor can generally not step down from a loan agreement. However, if your guarantor wants to leave the agreement desperately, you must settle the dues. Moreover, you would need to do this early. Discuss this with your guarantor and check how much you can afford. The guarantor may agree to help if he gets to leave the agreement.

However, check the extra fees that you may pay on early loan repayment. Some loan providers charge one. It makes the loan furthermore costly. Thus, act wisely and try to get back on terms with your guarantor to avoid a breach of the agreement.

Bottom line

Getting a guarantor loan is ideal if you struggle to support the loan repayments alone. The third person may help you make payments timely if you cannot. It helps you achieve your purpose without waiting until your finances improve. Moreover, you may fetch better interest rates and reduce the default risks with a guarantor-based loan. It helps you split the burden of the payments under tough finances.