Five Things to Consider Before Taking Out a Guarantor Loan

Five Things to Consider Before Taking Out a Guarantor Loan Loans have never been more difficult to get in the UK, with new regulations forcing banks to be much more selective in whom they loan money to. Even those with reasonably good credit can and do find themselves denied for loans. This has caused some to look for other finance arrangements, like payday loans, and in some cases even pawnbrokers. The increased difficulties these new regulations are causing for people with average credit, or who are first time borrowers, has given rise to a new type of loan. It’s known as a Guarantor Loan, and can help those having trouble borrowing from more traditional institutions and banks. The way it works is simple. Someone with good credit, and who also owns a home, agrees to repay the loan in the event the borrower defaults. Because of their guarantee, this person is known as the guarantor, and it’s their signature that assures the lender of repayment. In some cases they also may not be required to own a home. If you’re thinking about a Guarantor Loan, here are five things to consider before obligating yourself to someone else’s debt, no matter who they are:

  1. Not all Guarantor Loans are equal. Take a look around the various comparison sites to make sure you are getting the best deal. Loans where the Guarantor has a home and is using that to guarantee repayment will usually have the best interest rates. They give lenders the most security when considering whether to loan money or not, but also carry the most risk for the Guarantor.
  2. Loans guaranteed with homes can be taken by the lender if neither the borrower nor the Guarantor pay the loan. In these cases, the home will be sold. Any proceeds of the sale will be returned to the homeowner, but only after the loan repayment value and penalties have been satisfied. If you are considering being a loan Guarantor, make sure you can pay the loan value if the person you are signing for is unable or unwilling to do so.
  3. Lower repayment times or lower value loans are the best place to start. Some people will consider a loan of £5,000 for a period of five years, rather than a shorter timeframe, or a smaller amount. While it may seem like a better way to build up credit, it’s not. The best interest rate on a five-year £5,000 guarantor loan is about £10,800, with a monthly payment of around £220. That same loan for a two-year period will cost just £2,300 in interest, with a monthly payment of about £305. That’s a savings of more than £8,000. It’s also important to keep in mind that credit reporting agencies and banks like to see two years of solid payments. After two years a borrower should be able to get their own loan from a bank, and a much lower interest rate.
  4. Those who are new to loans and don’t have established credit, or who are recovering from bad credit or credit mistakes, may not fully appreciate the importance of paying off loans as agreed. This can put the Guarantor in a bad position, as missed payments defeat the purpose of a Guarantor Loan. In this case, the interest is unnecessary, and it would have been less costly for the Guarantor to have just given the money to the person borrowing. Because of this it is recommended that loan Guarantors either make joint payments with the borrower, or manage borrower payments so that there are no mistakes.
  5. The value of good credit for a Guarantor can’t be overstated. The better the credit rating of the Guarantor, and especially if they have a home, the lower the interest rate from the lender will be. While it may not seem like much at first, it can mean the difference between a 50% interest rate, and a 40% rate. Saving 20% on loan interest payments is not insignificant, and is something every Guarantor should consider when helping a borrower find acceptable lenders.

Getting a loan is never easy, but first time borrowers usually have a harder go of it these days than their parents did. The credit crunch has left available low cost credit options scarce, and few lenders are willing to risk a default by someone who does not have a demonstrated history of repaying their debts on time and in full. Keep this in mind as you consider options, and don’t forget to only borrow for two years. That’s the ideal time for the credit reporting agencies such as Equifax to identify and establish someone as trustworthy. It lets them see that payments are made as agreed, and will open many other finance options with banks and other lending institutions.

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