As with all loans you should always weigh up the pros and cons of guarantor loans, whether you are taking out a guarantor loan yourself or deciding to become a guarantor for someone else. With this in mind, we’re running through the pros and cons of guarantor loans so you can make the best decision for you.
What is a guarantor loan?
A guarantor loan is a loan or finance agreement where someone guarantees for you, usually a friend or family member. That means that, if you can’t afford to pay it, your guarantor will be contacted to make the repayments on your behalf.
Pros of guarantor loans
Extra Security
Having a guarantor provides an extra level of security for both you and the lender. This means that from your lender’s perspective, they may be more likely to accept your application and may even be more likely to lend you a larger amount.
From your perspective meanwhile, it gives an added sense of security that your loan will be paid even if you struggle to make repayments, hence taking some pressure off both financially and mentally.
Take out a loan with poor credit history
As a guarantor loan has that added security we just mentioned, it allows those with poor credit history to take out a loan if needed. Meanwhile, the security of a guarantor means these loans are also be ideal for those with little to no credit history.
Boost your credit rating
By paying off your guarantor loan on time and in full, you could boost your credit rating. This is true for any credit you manage well so it definitely pays to keep on track with your payments.
Cons of guarantor loans
Negatively affect your credit rating
Just as paying on time and in full can boost your credit rating, making payments late or failing to make payments can negatively affect your credit rating. This would also be true of your guarantor if they fail to make payments on your behalf.
High interest rates
Guarantor loan interest rates are often considerably higher than other loans; this means that guarantor loans aren’t a cheap way of borrowing. However, your interest rate will depend on your individual circumstances , for example how long you want to borrow for, your credit score etc.
Choosing a guarantor
While having a guarantor brings about the security we mentioned earlier, it can also be a pretty daunting step.
In order for someone to be your guarantor you will ideally need to be as open as possible regarding your finances, something that some people feel uncomfortable with. This can be quite a big step, especially if they are totally unaware of your financial difficulties, or if they are someone who is particularly close to you.
Relying on your guarantor
A guarantor will have to pay your loan repayments if you are unable. While this is agreed in your loan contract, when this situation materialises it can often cause discord between you and your guarantor.
Therefore, make sure you can both fully trust each other before signing up for a guarantor loan and be sure that entering into a guarantor loan is best for both of you and your relationship.
The most complained about financial product?
According to the financial ombudsman, guarantor loans were one of the most complained about products in 2020/2021 which doesn’t exactly shine them in the best light.
This was largely due to certain lenders, including Amigo, failing to carry out proper affordability checks when guarantor loans were taken out.
These issues are currently being resolved and will hopefully be a thing of the past. However, this is another reason why it’s best to choose your guarantor, and your lender, carefully.
Whether you are a guarantor or are taking out a guarantor loan, it is critical you are aware of all the advantages and disadvantages of guarantor loans. If you need further debt advice, use our free online tool to see what debt solution is best for you.
