How Do Guarantor Loans Work in the UK?

Getting approved for credit with a below-average credit history can be challenging. Since the perceived risk of default can be high in such cases, lenders generally ask borrowers to present a ‘guarantor’. A guarantor is a person who co-signs the loan application with you, taking accountability for repayments if you fail to repay the loan.

Usually, lenders ask for a guarantor for applicants with a low credit score. But finding a guarantor may not be a cakewalk. There’s a lot that guarantors need to consider before co-signing a loan agreement.

This article will give you an in-depth understanding of guarantor loans. Read on to find out if there’s a way out of these loans after you sign the agreement.

What are guarantor loans? 

A guarantor is a close friend or family member who partakes in the loan’s obligations with you by signing a guarantor agreement. Guarantor loans bind you and your guarantor in an agreement wherein your guarantor pays your debt if you’re unable to. Personal loan lenders may ask for a guarantor if you happen to have a low credit rating.

Guarantors are usually required to be informed about the potential risks of the agreement by a financial advisor. Once a guarantor signs the agreement, they can be held liable for repayments if the borrower fails to keep up.

Guarantor personal loans – who can be a guarantor?

The reason lenders ask for loan guarantors is primarily because of the applicant’s below-average credit history. Since credit scores significantly drive a lender’s decision, it implies that the guarantor should have a decent credit history. Here are some additional pre-requisites that a guarantor should satisfy:

  • A guarantor should be a legal UK resident.
  • They should have a UK bank account.
  • They should have a strong credit history.
  • They should be aged between 21 and 75 years.
  • Your guarantor should have a stable, regular income.
  • They may or may not be a homeowner.

If you’re getting involving a guarantor or becoming one for a friend, you should understand the gravity of the terms you’ll be dealing with if the original borrower defaults, the debt transfers on to you. Failing to keep up with repayments can damage your credit score, hampering your chances of securing credit in the future. Thus, both the borrower and the guarantor must understand the repayment implications of a guarantor loan.

How to apply for same-day guarantor loans online?

Here’s how you can apply for same-day guarantor loans online:

  • Decide on the loan amount: Working out a suitable loan amount is crucial in your borrowing journey. Evaluate your financial circumstances to assess your affordability. As per the rule of thumb, you should only borrow an amount you can afford to repay.
  • Self-assess your credit score: Self-assessing your credit score beforehand lets you know what to expect when applying for loans. This step can help you gauge the requirement of a guarantor. Besides, a prior check gives you enough time to dispute any incorrect items in your report. You can easily avail a free copy of your credit report online from one of the credit bureaus. 
  • File your application: You can either apply for a loan with a lender or a broker. While a lender will only process your application internally, a broker like LoanTube enables you to compare loan offers with actual interest rates from multiple lenders. An added advantage is that LoanTube processes your application with multiple lenders simultaneously, saving your credit score from the damage caused by multiple individual credit checks. Regardless of the platform that you choose, it is crucial to fill the application meticulously. Errors in your applications can negatively impact the results. 
  • Compare offers: This is an additional step if you apply with a broker. Once you’ve completed your application, multiple lenders will extend their offers to you. Carefully compare the interest rates, APRs and loan terms to find your ideal offer. 
  • Wait for the lender’s decision: After you accept an offer, the respective lender will run a hard credit check into your credit profile. If approved, you can move on to complete the agreement formalities with the lender. 
  • Disbursal: Lenders usually disburse the loan amount into your bank account via wire transfer. The process may take a few hours or days, depending on the banks involved. After you receive the funds, you are free to use them at your discretion. But, it would be best if you use the money responsibly.

How to compare guarantor loans?

When you apply for a guarantor loan with a free broker like LoanTube, your application gets processed with multiple lenders simultaneously, giving you a choice of offers. When comparing loans, don’t just compare the interest rate – consider the overall cost.

Annual Percentage Rate or APR is a figure that gives you the overall cost of borrowing, including additional fees – arrangement fee, early repayment fee, brokerage fee, etc. A loan with a low interest rate may have a high APR. Thus, it is essential to factor in these additional charges.

Is there any way out of a guarantor loan? 

Once you sign a guarantor agreement, there may not be a way out of it unless you or the guarantor settles the debt. A part of the reason is that the lender approved the loan based on the guarantor’s credit history and financial circumstances. Your only way out of a guarantor agreement is when:

  • The borrower settles the entire loan.
  • The guarantor settles the entire loan.
  • Your lender declares insolvency, which can ease your repayment burden if not shed it altogether.
  • You and the lender agree to a renewed payment plan, wherein you make smaller payments over a longer tenure.
  • You borrow a new loan to pay off the outstanding. But beware, because this could put you into a debt spiral.

An effortless way out of the guarantor agreement would be by having the borrower pay their dues in an ideal scenario. In this manner, the loan agreement will terminate since the involved parties have met the obligations. Lenders usually allow early settlement of guarantor loans, even if it is a long-term loan. However, they may charge you an early repayment fee.

It is imperative that the borrower and the guarantor share a close bond and thoroughly understand the implications of the agreement.

Should I consider guarantor payday loans?

Payday loans are high-cost short-term loans that you can repay over 15-45 days. People who struggle to regulate cash flow until the subsequent payday usually opt for this loan. With or without a guarantor, payday loans come at excessively high APRs that often exceed 300%. It may be wiser to consider other alternatives than opting for a payday loan.

Conclusion :

If you’re planning on borrowing a guarantor loan or are becoming a guarantor for someone, it is important to compare loan offers to find the most suitable one carefully. It is vital to ensure that the offer you choose is affordable for both parties.

Sam Smith

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