What is a guarantor loan?
A guarantor loan allows you to borrow money with the help of an extra person that you know, who agrees to ‘co-sign’ the loan agreement and make the repayment if you cannot. By having this extra security, guarantor loans can provide finance to those that may have been turned down by mainstream lenders and banks and have bad credit or no credit history at all.
If a customer repays their loan on time, it will cause their credit score to improve, making them more eligible for financial products in the future and able to achieve more affordable rates.
Applicants can borrow between £500 and £15,000 (depending on the lender) and this is repaid in equal monthly instalments over 12 to 84 months (1 year to 7 years). The industry is regulated by the Financial Conduct Authority and there are currently around 15 active guarantor lenders in the UK.
Who could be my guarantor?
The guarantor you choose should be someone that you know and trust and is typically a parent, spouse, sibling or close friend. The guarantor should ideally be someone that has a better credit history than you and the success of your application will depend heavily on your guarantor’s credit status and affordability. Lenders believe that if a guarantor with a strong credit score is willing to trust you with a loan, they we as the lender can trust you too.
An important point is that guarantor lenders will tend to favour those guarantors that are homeowners. This is because not only does owning a property possibly suggest a better credit history and income but the lender gets extra security knowing that the guarantor will be easily contactable and less likely to leave their premises on short notice.
For this reason, there are some lenders that only lend to those with a homeowner guarantor (e.g TFS, SUCO and Guarantor My Loan). There are several other providers that offer loans for both homeowners and tenant guarantors too (UK Credit, Amigo and Buddy) – but because this can be a deal breaker, it is important to check the criteria of the lender before applying.
What are the costs involved?
The APR is representative meaning that this is the rate that is offered to at least 51% of successful applicants. The rates can vary based on the duration of your loan and your criteria. For instance, the rates for those with tenant guarantors are typically higher because of the extra risks involved. As of March 2017, UK Credit charge 59.9% APR for tenant guarantors and 37.9% APR for homeowners.
Things to consider before applying for a guarantor loan
- Have you looked at the alternatives? Whilst guarantor lending can be considered cheaper than payday loans, there are other more affordable alternatives such as borrowing from family and friends or a local credit union.
- Have you thought about how you are going to repay the loan? Whether it is through your savings, income or inheritance, you need to budget and think how you are going to repay your debt otherwise there are extra fees involved and your guarantor will be liable for your payments.
- Do you have a good relationship with your guarantor? You need to select someone that you are in regular contact with and will continue to be during the loan term in case they are called upon for repayment.
- The guarantor must know their responsibilities when applying. They must understand completely that if the main borrower defaults, that they are expected to make repayment. So being aware of the potential fees involved and having some money saved just in case is very important.
How does a guarantor loan affect my credit rating?
By applying for a loan, the lender will conduct a credit search on your account, leaving a search footprint in the process. This will not damage your credit score but it will be suspicious to a lender if you make several applications in a short space of time. Your search footprint will eventually disappear after around 12 months.
For the guarantor, a ‘soft search’ is carried out on their credit file, which disappears instantly, so there is no impact to their credit rating.
When repayments are due, any successful collections or defaults will be recorded by the lender and sent to credit reference agencies such as Experian, Call Credit and Equifax. If the repayments are made on time, it can cause the borrower’s credit rating to improve and this will allow them to access more affordable finance in the future. However, if they miss repayments, it will cause their credit score to fall and make it harder to apply for funds in the long-run.
How long does the process take?
The majority of guarantor lenders in the UK, including George Banco can issue funds on the same day and sometimes within a few hours. The only time-consuming part is making sure that both parties (borrower and guarantor) have signed the loan agreement, completed the checks and spoken to the lender over the phone. This is why a typical application from start to finish can sometimes take a few days or weeks.
What happens if you cannot repay?
If a customer misses a monthly repayment, the lender will always contact them first to follow up on repayment by phone and email. If the customer is struggling, the lender must offer alternative repayment options such as arrangements or deferring payment.
If the customer does not respond to any communication, it is only then that the guarantor is approached for repayment.
Failing to keep up with repayments may incur additional interest, late fees and cause a negative impact to the borrower’s credit score.
What are the rights of the guarantor?
Upon signing the loan agreement, the guarantor has an obligation to cover the costs of the loan if the main borrower cannot meet repayment. When the loan is funded, it is sent to the guarantor’s bank account first as a security check. The guarantor is usually given a two week ‘cooling period’ where they can decide to give the funds back to the lender at no extra charge or send the money to the borrower to fulfil the loan agreement.
Once this cooling period has passed, the guarantor cannot leave the agreement or replace themselves with another guarantor. This is the because the amount funded and interest rate charged would have determined on the guarantor’s credit history, affordability and residential status. The only way to leave the guarantor agreement is for the loan to be repaid in full which will close the account.
Guarantor loans are becoming more popular as way to obtaining credit, so if you’ve had experience with any of the above companies, share your thoughts on them by leaving a review and you’ll be helping others find the right guarantor loan provider for them!