Guarantor loans are the new go-to consideration for borrowers, with all the new rules and regulations coming in the UK financial industry which has made it difficult for some people to get access of payday loans.
Guarantor loans are generally limited to immediate family members, however such loan applications could also be processed with a friend or colleague as a guarantor. Banks, agencies, lenders and financial firms could allow another person to guarantee repayment of the loan in case the borrower defaults on loan. This additional security ensures the borrower a home loan, personal loan or vehicle loan. Mostly parents help their kids but other situations are also fairly common for situations where the borrower has suffered a previous financial hiccup or some such financial meltdown.
SO HOW DOES HAVING A GUARANTOR HELP?
Guarantors allow borrowers who have insufficient fund to be able to get a loan. The borrowers are required to have loan repayment ability to the lender or the bank. The guarantor is someone with good credit ratings and preferably some assets who could ensure timely repayment of the debt in case the borrower defaults on repayment of the loaned amount. The borrower may not have a high enough credit rating to be credible for accessing the loan, so having a guarantor who is credible helps that the bank or agency to consider favourably the loan application.
What are the risks associated with being a guarantor?
Before taking up the responsibility of becoming a guarantor, people should understand how seriously this may affect their present situation and future financial conditions. Being a guarantor has long term effects on the credit report of the guarantor. Unfortunately, the banks don’t always explain all the risks associated with the process correctly. Many of them read the terms and conditions of the loan guarantee when it is already too late to back off. Credit agencies are reported of the bad credit when the borrower defaults on a loan by the bank or the agency who has granted the loan. So the risk of running a bad credit can become associated with the guarantor, especially of they too don't repay the debt, which is why knowing every nook and cranny of how the whole thing plays off is necessary.
Fortunately other organizations like Amigo loans have dedicated helplines and staff to inform people of the limit of the loans, the time line of the payment, interest rate and monthly repayment amount. Take into account all this and be informed before signing a loan agreement to save your credit record from being damaged badly.
What type of loan are you signing for?
People don’t realize before taking out the loans that the guarantees on the loans run to the whole debt. The guarantor may think they are agreeing to repay the capital if the borrower defaults, when in fact they are liable for interest and charges too. Understanding and excepting the total that you could be liable to pay as the guarantor is really important before you agree to be one.
Fortunately nowadays both the borrower and the guarantor has to be presented with clear and transparent information about the loan and their responsibilities. Additionally both have to sign their respective agreements.
So how does this process work?
A guarantor is liable to pay off the debt taken by someone else if they come to default on a payment. This means that in a situation where the borrower is defaulting on a loan, the bank will ask the guarantor to pay the premium next. If the guarantor fails to pay off the payable amount of the loan, banks may foreclose and additionally make a claim on on the guarantee held against the loan. If the guarantor does not repay the loan then they will be subject to the same actions as the borrower such as an adverse report on their credit file or legal action.
Some loan agencies like Amigo loans give guarantors some window to pay off the loan before the foreclosure, or they try to sort the situation over call or email.
Even though the primary assessment for the loan will be the creditworthiness and affordability of the borrower, the lender also carries out an assessment of the guarantor to ensure that they could meet the debt if the borrower fails to do so. Generally the borrower will be the primary receiver of all communications from the lender, bank or agency. But if the loan goes into default situation, then the guarantor will be sent the legal notice to pay off the debt as the guarantors are liable for the loan.
How to decide the best deal for getting a guarantor loan?
The borrower and guarantor should consider seeking financial and legal advice before taking out a loan, because if the borrower is not able to pay off the debt, then the lender is well within their limits to take legal action against the guarantor. Money lending organizations such as Amigo loans provide great support for finding out the details of what would be the loan amount and the interest rate for the loan. Since a guarantor loan affects the credit ratings of the guarantor when the borrower defaults, if you act as guarentor you must 100% trust the borrower or else you financial credability could also suffer.
This article is not intended to contain information about, or advertise, products offered by us but is intended to contain information, give opinions or discuss generally available products/services.
Warning: Late repayment can cause you serious money problems
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Representative Example: Representative 1286.98% APR on a loan of £300.00 with 5 monthly repayments of £101.03 Total amount repayable £505.13 Annual interest rate (fixed) 290%