Getting approved for a loan can be a very difficult process in an increasingly tough economy that has made it more and more difficult for people to maintain a high credit score amid unemployment, skyrocketing living costs, tightening credit standards, and other complications and circumstances. However, those who have found their applications rejected when applying for traditional loans need not despair. There are options for those with limited credit history, a poor credit score, or even lower income levels than most financial institutions would prefer. Those options come in the form of a “guarantor loan.”
What is a guarantor loan?
Banks and other lending institutions judge whether or not to loan you money based on your credit score and the amount of risk it poses to them as a lending institution. Those with higher credit scores present less of a risk, and thus are given loans with lower interest rates and lesser financial and other requirements. They often don’t need anyone else to vouch for their financial stability or their ability to repay the debt they’re about to incur.
But those with a lower score — no matter what the reason — represent a heightened risk to financial institutions and many banks and other lenders are simply unwilling or unable to take on that type of financial liability. They’ll reject these applicants and stipulate that their next attempt at securing credit should be with what is known as a “guarantor.”
Applying for loans with a guarantor effectively “guarantees” that your loan will be repaid to the bank; that’s because the bank is able to spread the risk between two consenting individuals and, if you fail to pay your debt back to the lending institution, they’ll be able to pursue both you and the guarantor who signed onto your loan. It gives them multiple ways of recouping their loss and opens them up to lending money to those who normally would not qualify for such services.
Who makes a good loan guarantor?
If you’re looking to apply for a guarantor loan, you’ll want to find someone who knows you well — and trusts that you’ll make good on your effort to repay your loan and reestablish your high credit score. A guarantor will be placing a large amount of trust in you, as a bank could pursue them to repay your debt in the event that you fail to pay.
Another aspect of a good guarantor is someone who is financially stable, has a full-time job, and maintains a high credit score. That’s because banks will offset your high risk with their implicitly lower risk when deciding just how much money to loan you and what interest rate you should be charged for the loan you’re about to receive. The higher the guarantor’s credit score, the more favourable the loan terms are which you’ll receive from the bank.
Finally, look for someone who is geographically close by, and perhaps related. You’ll want to find someone who will understand if you miss just one payment — someone who knows your situation well and can fill in the gaps if the need arises to do so.
What are the advantages of guarantor loans?
Minimal Emphasis on Credit Score
Guarantor loans are a truly fantastic option for those customers who have sailed through rough financial waters and have seen their credit score sink in the meantime. Many times, these scores are not entirely representative of an individual’s finances or their ability to pay, and they can unfair reject perfectly qualified loan applicants without so much as a second thought.
A guarantor loan ensures fairness in the lending decision and opens up credit to millions of people who otherwise would be in dire financial straits — unable to pay their rent, utility bills, or even grocery costs. Guarantor loans are a last resort, but an essential one that ensures people will not be financially stranded and unable to meet their commitments. For many, these essential loans serve as a lifeline.
Boosting Your Credit Score
A guarantor loan may not place much emphasis on the credit score when applying of a loan, but repaying it in a timely fashion will do much to help your low credit score rise to new heights. That’s because banks will report your payment history to the major credit reporting agencies. This only increases the need to make on-time payments, as this financial lifeline may also serve as a last-ditch effort at boosting a sagging credit score. This is a chance to right previous financial wrongs.
Larger Borrowing Amounts
Applying for a loan with a guarantor, as discussed previously, lessens the risk assumed by a lending institution. Because of this, banks are likely to issue a larger loan to applicants who apply with a guarantor. That’s great news for many people, as a loan is typically the last resort when trying to maintain financial solubility.
Guarantor Loans Online – Application Process
One of the best parts about applying for a guarantor loan is that you can apply for these guarantor loans online. That eliminates the hassle of filling out paperwork — either at home or the bank — and means a decision can be delivered in record time. You will still need all of the relevant paperwork and documentation, but applying for guarantor loans online will save you a trip to the bank, the need to fax documents, and the need to work with a cumbersome paper application.
What are the drawbacks of a guarantor loan?
First and foremost, guarantors should be aware that they are legally liable for the debt assumed by the person who is applying for loans with a guarantor. If the person fails to pay, the guarantor will be held responsible for the full amount of the loan and any failure to repay it all result in a dramatic hit to their own credit score. For this reason, guarantors should be sure that the primary lender they are assisting is able to repay the loan per the terms issued by the bank or lending institution. Otherwise, they may find themselves in between their own financial rock and hard place.
Furthermore, the primary borrower should be aware that the ability to rebuild their credit score (via reporting of timely payments to credit industries) is a double-edged sword. Banks will also report late payments to those same credit agencies and this could result in a further lowering of their credit score as well as increased difficulty in getting future loans — even with a guarantor.
Loans with a guarantor are a fantastic lifeline for individuals whose credit score has fallen victim to a tough economy or bad luck at the bank. They contain several advantages, and can be turned into real success storeys when combined with responsible lending and timely repayment.