Guide to guarantor loans
Although most people often failed to understand the attraction of ‘payday’ loans, they did demonstrate a vacuum in the UK as a solution for people with poor credit, for whom traditional high street lenders could or would not service.
Arguably payday lenders took advantage of this vacuum to penalise people with poorer credit ratings with prohibitively high interest rates, often leaving them in a considerably worse position than they might have been if they had never taken the loan.
The new/tougher regime to protect consumers from the payday loan industry is clearly fully warranted. Never-the-less vacuum of credit products offered up for people with poor credit scores still exists, so a number of businesses have sort to re-establish traditional lending methods. As was the case before computer credit-scoring became the preferred method of assessing eligibility of obtaining a loan.
Guarantor loans are unsecured loans that require borrowers to have a second person (with a good credit record , usually a family member but can be anyone) to act as a guarantor. This gives protection to the lender in case the loan cannot be repaid.
They tend to have very similar terms to personal loans, between one and five years, and allow people to borrow anything between £500 and £12,000.
Who are guarantor loans suitable for?
Guarantor loans tend to have a higher rate of APR than standard unsecured loans, but not as much as payday loans. As such, they are usually best suited to people with a low credit scores – people with poor credit records or no repayment histories whatsoever (as people with good credit history are able to access better products directly themselves).
Given that a guarantor is underwriting the loan and they could potentially access a standard unsecured loan with a considerably lower interest rate, it could be argued that it would be cheaper (and therefore) better for a person to pay back a friend or family member directly, but this would mean that they lose one of the main advantages of guarantor products. Guarantor loans enable people to demonstrate to credit bureaus that they have a track record of borrowing and repaying in their own name – building their credit rating for the future, making it easier to borrow individually.
What interest rates are typically charged on guarantor loans?
The interest rate tends to be higher on guarantor loans than that of standard unsecured or personal loans because the lender is taking higher risk by loaning money to someone with a poor credit history.
Personal loans tend to charge between 4% and 10% APR, but guarantor loans tend to be as high as 40%, or even 50% APR. However, the actual interest will depend on the lender, and the guarantor’s credit rating.
While this is a much higher interest rate, it remains one of the cheapest ways for people with bad credit to borrow (considerably cheaper than a payday loan, for instance).
Why guarantor loan applications get rejected?
While guarantors help loan companies ease the risk of their lending, there are still some eligibility criteria to consider. Applicants will have to be over the age of 18, hold a UK bank account and have a willing and suitable guarantor. And, whilst it’s the guarantor that will have their credit history scrutinised, the main borrower will still need to be able to demonstrate that they have the means to repay the loan.
If a lender decides that an applicant or a guarantor does not meet their lending requirements they will reject the application.
Who can act as a guarantor?
Just about anyone can act as a guarantor as long as they are not financially linked to the borrower, for example, a spouse, or someone else they hold a joint account or mortgage with.
The relationship between the guarantor and the borrower is not relevant to the lender, so it could be anyone that is happy to accept that responsibility. It could be a family member, friend, work colleague or any other willing person.
To be accepted as a guarantor, the person will have to have a good credit history themselves, be aged 18 - 74 and be a UK homeowner – although the loan is not usually secured directly against the property.
The lender may also want to see proof of ID, employment, bank statements and bank details.
Will the guarantor loan appear in the guarantors credit file?
Guarantors take on a degree of responsibility for the debt they are standing as Guarantor too, but not in the same way that they would be if it were a joint credit agreement. As such, assuming there is no default on the loan, there shouldn’t be any record of the loan on the Guarantors credit file.
If there were a default then that would appear on both parties’ reports – and the Guarantor would need to ensure payments were made to avoid a CCJ (County Court Judgement).
If all payments were made in full and on time then acting as a Guarantor would have no bearing on someone’s credit score.
Applying for a guarantor loan
The vast majority of guarantor loans are provided by online lenders, rather than high street banks, so the best way to find a guarantor loan provider is to check guarantor loan comparison tables*. Of course, there are few names which will be unfamiliar brands as this is a relatively new sector, but don’t let that deter you.
Once the lender has made a decision (which can take a few days), the funds will then be transferred to the bank account specified on the application.
Broker services are also available which help people navigate potential loan options, but in many cases broker fees are then applied to loan, making the interest rate considerably higher than those which the same person would have got if they had gone direct to the lender.
What alternative loans are available?
Guarantor loans are not the only financial product available to people with low credit scores and, given their high interest rates and need for people to have a potentially sensitive conversation with a prospective guarantor, people should explore the alternatives before committing.
Bad credit or credit building cards offer people with a bad credit history (or people with no credit history whatsoever) the opportunity to get a credit card with which they can demonstrate a good history of making credit repayments, and therefore build a good credit history. They have higher interest rates than other cards and tend to offer more limited credit limits, but they can be very useful to people struggling to access credit elsewhere.