You're reading: How Do Guarantor Loans Work?

The process with these types of loans is the same way when you apply for any loan – your credit background and capacity to pay will be checked. You will need to submit some papers and sign a contract upon approval. The amount of money that you get will be determined by the lender. But this time, you should present a guarantor.

In case you default from your payment, the second person will be the one responsible to continue paying off your debt. He or she can be your sibling, parent, relative, spouse, and friend. Because this person understands your current financial condition, consenting to the terms and conditions for guarantor loans should not be difficult. However, he or she should be capable of repaying your loan.

Who can be your guarantor?

Your guarantor should be someone close to you and someone who can understand your situation. He or she should be prepared to repay your loan in case you encounter another financial problem and you can no longer keep on with your monthly payment. He or she will go through the same processes – proving the authenticity of the name and address and doing a credit check. This person must have a good credit history and payment record so the lending company can accept him or her as ‘security’.

How can you convince someone to take the risk of paying off your loan?

It is not easy to convince people to agree to guarantee your loan thus you can only seek the support of those who are related or close to you. You can honestly tell him or her why you need to apply for a loan. Discuss with the person how you plan to pay it off – either through your salary or by getting an extra job. In this way, your guarantor will not think twice about giving his support to your loan application, especially if the individual has his or her own financial obligations like credit card, mortgage, and others.

How do guarantor loans help people with bad credit?

Loans that involve friends, family, and others make it possible for people who have bad credit score to apply for one. You may not have a good credit standing to back your application, but your guarantor is. Lenders consider less or no risk because again, the second person acts as their ‘security’. Another thing, if you are able to pay off your guarantor loan without any problem, this will improve your current credit score. Thus, you have a higher chance of getting approved for your next loan.

What are the factors to consider before getting this type of loan?

Check for hidden charges; you do not want to get into another financial mess because of this. Likewise, inquire about the APR or the Annual Percentage Rate. This is not fixed as it depends on the lender, but in can go as high as 50%. You may find this hard to believe, but this represents the risk that the lender is taking for approving your loan.