A guarantor loan is a loan that involves a third party, either your spouse or another family member or friend, who promises to pay off the debt when you fail to do so. Guarantor loans are getting famous among subprime borrowers because they struggle to secure funds due to their poor credit reports. Arranging a guarantor with a good credit file improves their chances of being approved because they promise to settle the debt in the event of default.
Guarantor loans are not easy to secure because the default you make could damage the credit rating of the guarantor as well. Furthermore, even if you manage to discharge your obligation on time, linking your account to someone whose credit rating is bad will have a damaging impact on your credit rating too. This is why guarantors hesitate to enter into a loan agreement with you.
Each lender charges different interest rates. While involving a guarantor will help you qualify for better interest rates, there is still a possibility of qualifying for a loan at a high interest rate. You should carefully compare interest rates.
3 steps to choose the best guarantor loans
If you are looking to choose the best guarantor loans, you should consider the following tips:
Figure out the amount you need to borrow
Under no circumstances does having a guarantor insinuate that you can borrow more than your affordability. Do not forget that the onus of repayment is on you. Only if all means of recovering money from you are exhausted in case of a default, is a guarantor called on. Guarantors do not access funds, nor are they allowed to utilise them. They only make a promise to clear your dues when you make a default.
Therefore, a lender would make a lending decision based on your affordability. So, before you apply for a loan, you should carefully examine your repaying capacity. How to do it?
- You should grab a bank statement of the previous three months to determine your average income and expenses.
- Figure out how much you are left with after meeting all your expenses, especially essential ones.
- Afterwards, you need to determine if you have enough funds to meet the total cost of the debt.
You might have to chip away at discretionary expenses, but remember that you cannot know the actual cost beforehand, so always leave a wiggle room in your budget to avoid falling behind on payments.
Ensure that you do not borrow more than you need. Sometimes, you might afford a larger debt, but it is not recommended that you borrow more than you need. For instance, if you need £100, you should never make it to £150. Do not forget that an additional amount will significantly mushroom the total amount of the debt.
Calculate what you can afford to repay
Once you have determined how much amount of money you have to borrow, the next step is to calculate your repaying capacity. Knowing the actual cost of the debt is not easy at all unless you apply for it formally. Interest rates that you see on your lender’s website and comparison websites are mere estimates. They are a representative example.
Comparison website cannot actually be conducive to choose the most affordable loan.
Lenders cannot let you know actual interest rates before you put in a loan application because interest rates are decided after perusing your credit score and income sources. Actual rates will always be higher than representative rates. But you can consider those rates in order to determine your affordability. It is essential to know beforehand whether or not you can manage payments.
- Make sure your budget has the wiggle room to discharge extra payments because actual rates will be higher than estimated rates.
- Your budget should not run out of money to meet all your essential expenses in order to repay your debt.
If you find that you cannot afford to pay back the money you need, try to borrow a smaller amount. Restricted borrowing amount might improve probabilities of approval for a loan at competitive interest rates.
Find a suitable guarantor
The next step is to determine who will be your guarantor. Bear in mind, there is always a risk to be a guarantor for someone whose credit rating is poor. Whosoever becomes your guarantor is at a risk of losing your credit rating. You should always ensure that you will not struggle to repay the debt.
At the same time, ensure that the person who is supposed to act like a guarantor is willing to do so. They must understand the consequences of acting as a guarantor before entering into a contract with you.
It is your responsibility to update them while convincing them to guarantee for you. Hiding any facts will ruin your relationship with the guarantor.
Upsides and downsides of guarantor loans
Here are the upsides and downsides of guarantor loans:
Upsides
- It makes it easier for subprime borrowers to qualify for a loan.
- If you have already arranged a guarantor and all your documents are ready, you can have your loan approved in a matter of seconds.
- Some guarantor loans come with an instalment repayment plan. If you discharge the debt on time, your credit score will be improved.
Downsides
- Interest rates are high despite a guarantor with a good credit rating. Guarantor loans are more expensive than personal loans.
- Your credit score will be damaged if you fail to repay your debt. This will make it even more difficult to borrow money down the line.
- Your guarantor will also see their credit score go down if you default. This will make it complicated for them to avail themselves of lower interest rates in the future.
- Your relationship with a guarantor will also be affected.
Summing up
In order to choose the best guarantor loans, you will have to determine how much money you can afford to borrow, compare interest rates and then find a guarantor who is comfortable with entering into your contract.
Understand the advantages and drawbacks of guarantor loans before applying for them. It is always recommended that you improve your credit score before borrowing money.