If you are finding it hard to get approved for a personal loan, one good option would be to take out a guarantor loan. Oftentimes, when your credit history is either limited or poor, obtaining a personal loan can be a huge challenge. If you can find a family or a friend that can act as a guarantor for the loan, you may have better chances at borrowing some extra cash.
Understanding What a Guarantor Loan is
A type of personal bank loan, a guarantor loan is financially backed by the borrower’s relative, friend, or work colleague. Guarantors will be required to have a really good credit score. They are also expected to pay off the debt in the event that the borrower is unable to fulfil his dues.
It is important to understand that guarantors are not just vouching for a borrower. Guarantors are actually taking the responsibility of assuming the repayment of the debt if there comes a time that the borrower will default. Lenders need guarantors when dealing with a first time borrower or one whose credit record is poor. When the main borrower is considered too high a risk to lend to, a guarantor offers lenders a means to get back the money they are owed as he is deemed to be the more reliable person.
Who can be a guarantor?
There are certain criteria that a person must be able to fulfil if he were to act as a loan guarantor. Among the basic requirements include being of the right age which is at least 18 years old. One must also be able to show proof of having the means to pay the loan back. Guarantors also need to have a fair/good credit history. They have to prove their income too, which means that they have to either be employed, retired, or self-employed. They need to show proof of their ability to pay back the unsecured loan. They must not also be the spouse of the borrower nor must they share any financial account with the borrower. The credit score of the guarantor is crucial since the amount that you will be able to borrow would depend heavily on it.
Understanding the Risks
The biggest risk that guarantors face has to do with the possibility of the borrower not paying back the quick loan, which means that he will have to take over. Being named a loan guarantor, however, does not affect one’s credit record. Guarantor lenders also run credit checks on guarantors to assess how qualified or not they are. But when the borrower defaults, the loan will often be added to the guarantor’s credit record. Also, after signing a loan agreement and the amount has been paid out, one will no longer stop being a guarantor.
Who Can Be a Loan Guarantor?
When a borrower cannot obtain a home loan on his own, it is usually because he does not meet the requirements of the loan provider, especially the conditions about having a good credit score. This is when a lender will require the borrower to provide a loan guarantor to co-sign the loan.
If your credit score does not meet the loan requirements, you must provide a guarantor in order for your secured loan application to be approved. However, remember that not everyone can become a guarantor. Here’s why:
A loan guarantor must meet the basic requirements
You cannot ask your 13-year old daughter to become a loan guarantor. Your friend who is living abroad cannot also co-sign a loan contract for you. A guarantor must be of legal age and must be a permanent resident of the country where the loan will be obtained.
A loan guarantor should have good credit
Since you don’t have good credit, it does not make sense for a lender to give you a loan if your guarantor also has bad credit. Most loan providers assess a borrower’s creditworthiness through his or her credit score. Thus, if you need someone to co-sign the loan for you, that person must have a good credit rating.
Being a loan guarantor is a huge responsibility since the co-signer assumes responsibility for the loan in case the borrower fails to pay. The lender will go after both the principal borrower and the guarantor to recoup the money owed. It is important to let the guarantor understand this before signing any loan agreement.