Loan rejection is not the end of the world. There are many options open to people with bad credit. The financial difficulty that most families experience or have experienced recently means many people must consider a range of alternative funding options. One of these choices is to take out a guarantor loan. This is when the loan applicant is responsible for repayments but in the result of a default, the person promising to guarantee the loan becomes financially viable for it. Guarantor loans typically have a higher rate of interest than other types of loan. They can still be a cheaper option compared to some other choices you might consider.
Choosing a guarantor for your loan requires careful consideration to ensure you get the right person. It is also important that they are comfortable with acting as a guarantor on your behalf.
The criteria of a guarantor
A guarantor is a person who agrees to take responsibility for a loan in the result of a default by the person in whose name the loan was taken out. The guarantor must sign a form that legally binds them to become responsible if this should happen. So long as the applicant continues to make the regular scheduled payments as agreed, the guarantor does not need to do anything else. Nevertheless, because they are agreeing to take responsibility should the worst happen, they must be a financially responsible person. They are required to fit a number of important criteria. Before you ask anybody to be a guarantor for your loan, ensure:
- They are between the ages of 18 and 75
- That they have a good credit rating
- That they demonstrate the ability to pay the loan should the original applicant default on their repayment plan
- That they are not the applicant’s spouse or live-in partner
- They do not share a bank account with the applicant or are otherwise financially dependent on them
Some providers may impose other criteria such as that only full-time employees are eligible, excluding the self-employed, and insisting the guarantor is a homeowner. Some may require certain extra age restrictions such as no retirees, or a minimum age of 21 or 25. Extra checks and requirements depend on the value of the loan and the provider.
Ask family and friends
Almost anyone who fits the above criteria can be a guarantor. In most cases, people seeking a guarantor loan will ask a family member. Typically, this will be a parent (so long as the person is financially independent of their parents), an older sibling, an aunt or uncle, or grandparent. The guarantor need not be a family member though. It is perfectly acceptable to ask a friend or trusted colleague who is financially responsible and able to act as guarantor. The important issue is trust – only ask a person that you trust and who trusts you equally in return to avoid any complications should you be unable to make repayments. After all, they become financially responsible for the debt if you default.
This is important because once they have agreed to be a guarantor for a debt, they are responsible for the duration of the agreement. They cannot back out or change their mind before the debt is paid off. Choosing a guarantor must be a careful process considering not just whether the person fits the criteria, but also whether they are prepared for the possibility that the loan applicant may eventually be in a situation where they cannot pay. It will damage the credit rating of both the person taking out the loan and the guarantor if neither are able to pay.
If friends and family are not able or are unwilling to be guarantor for such a loan, there are some specialist private companies who could do it for you. Although most of these acts as rent guarantors, there are some who will provide debt or loan guarantor services too. When you apply for and are successful, the guarantor will have the right to take legal means to extract the money from you if you default. Think carefully before using a private company; it is always best to seek options among family and friends first.
Such firms often ask for a co-signer who will become responsible in part for repayments. If they fulfil the criteria for this, they are likely to fulfil the criteria to be a guarantor too. If this is the case, it is a wise choice to bypass such private businesses and apply for a guarantor loan as standard. However, it is perfectly possible for the co-signer to be ineligible as a guarantor but eligible for a co-signer as they do not undergo a credit check.
There are many loans for bad credit options for people with a poor credit history. Guarantor loans, where a second person promises to make payments in the result of a default, is just one.