What is a guarantor loan?
A secured loan is an unsecured loan where someone else is responsible for making your repayments if you are unable to do so. For example, if you are unable to repay your loan and your parent is a guarantor, they will have to pay your monthly payments for you.
Loans with surety are usually taken out by people with bad credit because lenders are reluctant to offer them a loan without a repayment guarantee. Often times, lenders will need the guarantor to be a landlord or someone who can prove that they have enough wealth to cover the cost of the loan.
How do guarantee loans work?
If you want to take out a guarantor loan, you must first find a guarantor. This could be a friend or family member who is able and willing to make payments for you if you are no longer able to meet your repayments.
Your surety cannot normally be someone who is financially related to you, including partners and spouses. Usually, your guarantor will be contacted within 48 hours of your first missed payment as a last resort.
Secured loans usually come with high interest rates. For this reason, it is important that you have a good relationship with your guarantor, as a high level of responsibility will be assigned to him.
Who can be your guarantor
You can ask someone who is not financially related to you to be your surety, such as a friend, family member, or co-worker. In addition, they must:
- Be 18 years of age or older
- Full-time job
- Someone who is not your spouse
- Someone who doesn’t share a bank account with you
What are guarantor loans used for?
Secured loans can be useful if you don’t have a good credit history and want to rebuild your credit score. This is because every time you make a monthly payment on time, you will get a good score on your credit rating.
This will help increase the likelihood that you will be accepted for credit in the future. Like, for example, for a standard unsecured loan, a mortgage or a credit card, without having recourse to a guarantor.
Still, this will only work if you make your loan payments on time. If you fall behind, you could further damage your credit score.
It is recommended that you check your credit score before applying for a loan or credit card, because if you are rejected, your score could be damaged. The same can be said if you are doing a lot of applications in a short period of time.
Are secured loans expensive?
Guarantor loans can be expensive, with the APR typically around 50%. Rates vary from lender to lender and depend on your personal circumstances, such as your credit rating and work history.
This rate may seem high, but it can be a cheaper option compared to some other forms of credit like payday loans for example.
Here is a representative example from the website of a well-known guarantor lender:
The representative APR rate is 49.9% APR (variable), so if you borrow £ 4,000 over 36 months you will pay back £ 195.16 per month and £ 7,025.76 in total.
It is important to consider that some lenders may charge significant “upfront” and arrangement fees. When applying for a loan, do your research and look for these hidden fees as they can end up being quite expensive.
What to watch out for with secured loans
It is important to make sure you have a good relationship with your guarantor when you go for a guarantor loan. You both need to understand the level of risk involved.
In the event of default, your guarantor will have to cover the remainder of your total amount for the duration of the loan. They could even lose their home if the loan was secured on their property.
Try to borrow responsibly and limit your borrowing as little as possible. Although many loan companies allow you to borrow a guarantor loan of up to £ 10,000, a larger amount can place a greater financial burden on you and your guarantor.
It is also essential to borrow from a lending company approved and regulated by the Financial Conduct Authority (FCA).
FCA-licensed and regulated lenders should put in place affordability controls to ensure that they only allow you to borrow what you can afford to repay.
If you are struggling with existing debt, you should seek advice before considering another loan. Late repayment can cause you serious money problems. For help, visit moneyadviceservice.org.uk.
Summary of the Guarantor Loan
Guarantor loans can help you acquire credit if you have a bad credit history, by allowing you to call a guarantor to make repayments for you if you are no longer able. The key elements to consider are:
- Your surety can be a friend, family member or co-worker, but they cannot be financially related to you
- The guarantor is responsible for repaying your loan in the event that you can no longer make repayments
- You can usually borrow up to £ 10,000 over 5 years
- The APR is usually around 50%
- Secured Loans Can Be Helpful If You Have A Bad Credit History
- It is important to choose a responsible lender who is licensed and regulated by the FCA.