A quick guide to guarantor loans – in association with Guarantor Loan Comparison
For some people getting a loan can be difficult, especially if they have a bad credit history or no credit history at all.
Guarantor loans could provide one solution.
We take a look at what these loans are, who they are suitable for and offer some essential advice for potential guarantors.
What is a guarantor loan?
A guarantor loan is an unsecured loan that requires the borrower to have a second person acting as a guarantor.
Loans tend to last between 1 and 7 years and generally you can borrow anywhere between £1,000 to £15,000.
Guarantor loans are not a new concept; it is how banks used to lend before computer credit scoring took over and is a trust-based system.
It is still quite common for landlords and mortgage companies to ask for guarantors today.
Is a guarantor loan right for me?
Generally, these loans are aimed at people who are struggling to get a loan through traditional means – be it because of a poor credit history or having been rejected elsewhere. These loans also allow you to borrow a higher amount than you would be able to normally with poor credit.
Who can act as a guarantor?
Almost anyone can act as your guarantor, as long as they are not financially linked to you (i.e. a spouse). A guarantor could be a family member, friend or even work colleague.
For your guarantor to be accepted they will usually need to be over 21 with a good credit history and also be a UK home owner, however note that guarantor loans are not secured loans.
Checks on your guarantor are usually identical to normal credit checks – they will need to provide bank statements, bank details and proof of ID.
How much interest will I pay?
This varies between lenders and depends on your credit worthiness only but representative APR ranges from 39.9% to 59.9%.
What if I default on the loan?
If you default on the loan, or fail to keep up with payments, the lender will ask your guarantor to cough up.
They will also chase you for the remainder of the loan plus any interest, and in some instances may take both you and your guarantor to court.
Who offers guarantor loans?
Amigo Loans, UK Credit Ltd, 1Plus1 loans and Buddy Loans are some of the better known lenders.
I’m thinking of becoming a guarantor. What does this mean?
Guaranteeing a loan or other credit contract makes you responsible for paying the debt should the borrower fail to keep up with their payments.
Being a guarantor is risky, so if you are considering this route make sure you know exactly what the implications are.
Most lenders require the guarantor to be a homeowner because owning a home gives extra security and means they are less likely to disappear when repayment is due.
What should I consider before agreeing to be a guarantor?
According to Citizen’s Advice Bureau, before you agree to be a guarantor, you need to ask yourself:
• Why do they need a guarantor (do they have a poor credit history? Is it likely they will have problems making the payments?)
• Is the borrower responsible enough to have a loan?
• Is the loan a wise one (is it for something they really need, or could they just save up for it?)
• Would you be willing and able to back the loan (plus debt recovery costs) if the borrower can’t or won’t?
• What would you list as security, and are you willing to risk having it repossessed if the money can’t be paid back?
• If in doubt, seek legal advice first.
What can I do to protect myself as a guarantor?
Becoming someone’s guarantor should not be taken lightly; it’s far riskier than simply giving a character reference.
It is important to know that, if the borrower defaults, the lender is entitled to come after you for the money before they go to the borrower, if they think you are more likely to be able to pay up.
If I agree to be a guarantor could my creditworthiness be affected? What if the borrower defaults?
When you guarantee a credit agreement you are taking on a degree of responsibility for the debt, but not in quite the same way as entering a joint credit agreement.
James Jones of Experian says: “While the terms and conditions of guarantor agreements can vary, we wouldn’t expect to see a record of the agreement on the guarantor’s credit report (as would be the case with a joint account), unless of course the agreement defaulted.
“In that case, you may well see a default registered on your credit report too and, if payment was still not forthcoming, perhaps a county court judgment as well. So, as long as borrower pays the agreement on time every month -the debt will not show on your credit report and should, as a result, have no bearing on your own credit rating.”
However, if the borrower defaults, the lender can chase you up for the payments first, especially if you seem to be more financially capable of paying off the loan. If you fail to pay, then legal action can be taken against you.
The Citizen’s Advice Bureau gives this advice:
Try to limit your liability
Many guarantees cover all of a borrower’s obligations to a lender (these are called “All Obligations” guarantees). This means that if you agree to guarantee someone’s car loan, you could be unwittingly guaranteeing their mortgage, other personal loans, and credit card debt as well. You can ask that the guarantee agreement limits the amount you guarantee (i.e. “limited guarantee”).
Make sure you receive the documentation
When guaranteeing a loan, the lender must give you a copy of the credit agreement so that you know what their payment schedule is, and also a copy of the guarantee contract (a contract of guarantee must be in writing and must be signed, otherwise it cannot be enforced).
For a credit contract, they have to do this within fifteen days of the guarantee contract being signed. The creditor must inform you of any changes to the credit contract which either increase’s the debtor’s obligations or shortens the payment period, within five working days. Any other notices sent to the borrower must also be sent to you.
If the borrower misses payments and the lender starts the repossession process, they must send you a copy of the repossession notices. If you do not receive the notices, your liability may be reduced.
If you think the credit contact is oppressive, then as a guarantor you are entitled to apply to the Court to have the contract changed.
Take care in choosing security for the loan or credit contract
If you provide a ‘secured guarantee’ by listing items of property that can be claimed as repayment (i.e.security), they will be taken if you cannot pay the loan. Because of this it is important you do not list any items worth more than the debt, for instance your house.
Get a written agreement with the borrower
As a guarantor, you have no direct control over the borrower’s loan repayments. You can insist on a written agreement with them, which:
• requires the debtor to keep you informed of their financial decisions
• allows you to see how much money is in the debtor’s accounts
• states exactly who is responsible for which part of the loan