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Author: Internal Compliance Department
What are Guarantor Loans, how do the help borrowers and what are the pitfalls.
So when we search the internet for loans, it is more than likely that at least one, if not more, of the results will be for a guarantor loan. Companies like Amigo Loans seem to be at the top of many Google searches, and we are all probably aware of their TV advertisements where the 2 blue friends join hands to become the ‘M’ in the company name.
Before we begin looking at these type of loans, let’s look briefly at the other options available to these customers. Obviously we could ask family or friends to lend us some money. Some may actually, based on the fact they know us well, not trust us enough to risk their ‘loan’ becoming a ‘gift’ and decline to help on that basis. Others may actually trust and believe that we will repay them the loan, but simply do not have the spare cash to lend us.
Another option is a short term, or Payday Loan. These can be very expensive as they are usually provided to those borrowers with a higher risk of defaulting than let’s say a high street loan. There is also the assumption that your credit history will allow you to obtain such finance. While these types of lenders are not expecting a glowing credit history and score, they will want to see that, based on your past performance, that they are likely to get their money back. While you may be able to prove that you can afford the loan, if your history shows you would rather not repay credit, then you may struggle to get it.
So the answer may be the Guarantor Loan. In very simplistic terms, with this type of loan the lender will lend you the money but will have an arrangement in place with someone else, the guarantor, who will be called upon to repay the loan if you fail to do so. This has 2 distinct advantages to the borrower.
Firstly it is likely, as there is a lower risk of default, that the interest rate will be considerably lower than with a standard short term loan. This means that the monthly repayments and the total cost of the loan will be less and money will be saved. The second advantage is that you own poor credit history will not, in many cases, prohibit you from getting a loan as it will be the Guarantors credit history that is given the greatest weight.
So anyone with a friend who is willing to be a guarantor can get a guarantor loan, right? - Wrong! Responsible lenders will still be required to make sure that the loan is affordable, and secondly the guarantor has to satisfy the lender that they are willing and able to take over payment of the loan if the borrower fails to do so.
When the loan is made, it is the intention that the borrower themselves is going to be able to honour the repayments. It is therefore crucial that, under their affordability assessment obligation, the lender ensures that you will have enough residual income after current monthly expenses and existing credit commitments, to make the payments on the new loan. The idea of a guarantor loan is to overcome the problem of the ‘won’t pays’ rather than the ‘can’t pays’. The loan therefore should not be made if it is obvious that the guarantor will be required to cover some, or all, of the repayments from the start. In these cases it should be the guarantor that is taking out a loan as the borrower.
As the lender will not be placing as much weight on the borrowers credit history, they need to make sure that the guarantor has the means, and the credit history, to demonstrate that they will be willing and able to repay the loan should the guarantee that they have provided needs to be called on, otherwise it is like having a spare torch with no batteries. It looks good in principle until it is needed and then no light is produced.
If the guarantor does not have the spare income to repay the loan if needed, or has shown that they too have a history of not repaying loans, then it is highly likely that the lender will not accept them as a guarantor. Many guarantor lenders require the guarantor to be a homeowner, or at least have an A1 credit history, thereby giving added security to their money.
So what considerations should someone considering being a guarantor take? First and foremost you must be sure that you determine that the borrower is able to repay the loan, and also that you trust them enough that you are sure that they will repay the loan as agreed. Otherwise, as they say, you will be left holding the baby.
Secondly, you need to be sure that you can afford the repayments should the borrower fail to do so as this is what the lender will expect you to do. A guarantor loan normally does not affect a guarantor’s credit file IF payments are made by either the borrower or the guarantor on time. However if the loan is defaulted on and court action is taken, the CCJ will normally appear on both credit files. This means that your once glowing file that allowed you to get mortgages, credit cards, phone contract and high street loans, now may put you in a similar position to the person you were trying to help.
As you will hopefully see from this article, guarantor loans can be very helpful to the borrower and can allow someone who has a good credit history to help their friend or family member out in difficult times. However it is not a decision that should be taken lightly as the consequences can be very serious for the guarantor if things go wrong. You should really weigh up the pro’s and con’s carefully and if need be seek some independent advice.
Oh, and a final thought, do not be pressured into agreeing to be a guarantor because you are uncomfortable saying no to your friend or family member. It is not like you are simply refusing to lend them £5 or buy them a packet of cigarettes. I can almost guarantee that the feeling will be even more uncomfortable when you get that call asking for payment, or the County Court summons arrives in the post.