What is a Guarantor Loan?

What is a Guarantor Loan?

For a lot of people today it can be quite difficult to obtain a loan from a bank in the conventional sense. Many people find themselves in a difficult situation where they want to borrow some money but are unable to find someone to lend to them. The main reason for banks declining an application for a loan is usually your credit score based on what they find on your credit file.

This history of your credit transactions may show the potential lender something they don’t like, such as a missed payment, or equally detrimental for your loan application, you may have no credit history at all! Credit file systems are used by banks and lenders to gauge how trustworthy or responsible you will be with the money they are lending you. So if you have no credit history at all, it can be as bad or even worse than having bad credit as the lender has no way of judging your trustworthiness when it comes to paying back money. This is one area where guarantor loans are extremely useful.

Matthew, an adviser at ukhomeandpersonalloans.co.uk, sums it up nicely: “a guarantor loan is basically the lender’s way of getting someone to vouch for you. If someone with a good credit profile can guarantee that you’ll pay the loan, it makes it very low risk and easy for the lender to give you the money”. This has been quite common practice amongst landlords for a long time, especially when they have first-time tenants who have perhaps just moved out of home and don’t have a credit file to demonstrate their history of paying the bills. It’s a Catch-22 situation which is why it’s a good thing the guarantor system exists, otherwise many of us would probably still be living at home! The Telegraph has done a good piece on how to build a credit history.

If you have bad credit you might be looking to take on a small loan with a guarantor to help rebuild your credit profile. The loan might be used to clear off other higher interest debts like credit cards and store cards and get your unsecured debt consolidated into a loan which is more manageable with your monthly budget. It’s worth noting that a guarantor loan will also be unsecured unlike a secured loan or mortgage, which uses property as collateral.

Who can be my guarantor?

In reality almost anyone can be a guarantor from the lenders point of view. It’s not for them to decide which friend could be a guarantor and which friend can’t! The real deciding factor will probably be which friend is willing to put their name next to yours and guarantee to make the payments on the loan if you don’t manage to for whatever reason. Often it’s a parent helping out their kids as the guarantor; however, there is no reason why it couldn’t be anyone who is willing. The only real criteria is that they have a good clean credit profile and pass the lender’s checks and that they are not financially linked to you (i.e. not your partner/spouse)

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