If you have a poor credit rating, a guarantor loan could be a way of obtaining credit to address emergency needs or to assist in improving your credit score.
A guarantor is normally a colleague, family member, friend or business associate who has a good credit score and would be able to repay your loan should you be unable to yourself.
You would still sign as the lender, but the guarantor would co-sign the credit agreement.
You would agree to specific repayment terms, non-payment of which could still impact negatively on your credit score, and if you miss payments, the guarantor would then become responsible for settling these amounts.
This type of loan normally allows for higher value loans and also repayment terms of up to 5 years.
The lender would normally require that the guarantor is over 21 years of age, not financially linked to you (i.e. not your spouse), must have a good credit history and possibly be a homeowner in the country.
The home will not be used as security for the loan as guarantor loans are unsecured loans.
Should the guarantor pay some of your instalments, this does not absolve you in any way. You will be jointly liable and both you and your guarantor can be taken to court in order to recover the outstanding monies if it became necessary.
Finding a guarantor may be a bit difficult if you have had problems repayment loans in the past and if you have a history of non-payment as this would be very risky for the guarantor if you fail to make the agreed upon payment.
This could also impact on the guarantor’s credit history if you do not make the agreed repayments on time.
Both you and the guarantor will undergo credit checks to determine creditworthiness and this will also impact on the amount offered.
Although lower interest and longer repayment terms can be negotiated with this sort of loan, the human factor also needs to be taken into account.
The guarantor would also need to be sure that repayments will be met and the loan will be paid in full and that measures have been put in place to ensure this takes place.
These types of loans are often used to purchase property where the purchaser is identified as a credit risk and would not obtain the loan of his own accord.
The guarantor then stands as surety for the repayment of the mortgage should the purchaser default on payments.
This can result in a serious risk for the guarantor over the long haul. When signing as a guarantor, ensure that you accept limited risk so you are not implicated in any other debt the person might have or might accumulate in future.
Make sure that the loan is genuinely needed and that the borrower should be able to repay the debt without too much of a struggle.
As a guarantor, it would be recommended that there be a written agreement between you and the borrower stating responsibilities and that you will be made aware of their financial status at all times so that you are aware if there are any problems with regards the repayments and can act accordingly.