Use this guide as your simple, easy to understand, goto reference on understanding everything there is to know on guarantor loans.
- 1 THE BACKGROUND
- 2 GUARANTOR LOANS IN A NUTSHELL
- 3 THE APPLICATION PROCESS
- 4 HOW DOES THE GUARANTOR FIT INTO THIS?
- 5 LENDER V BROKER – WHAT’S THE DIFFERENCE
- 6 REGULATION
- 7 INTEREST RATES AND APR
- 8 THE GUARANTOR LOAN SMALL PRINT
- 9 PROS OF A GUARANTOR LOAN
- 10 SUMMARY
Not everyone has a good credit history and if you do, well done. For the millions of other people in the UK who haven’t, sometimes through no fault of their own, trying to apply for a loan or finance is a nightmare and you don’t need to check your credit score to know that.
However before the credit crunch in 2008, getting access to credit was fairly easy, even if you suffered from poor credit and this easy access to finance was partly to blame for the oncoming recession.
Banks and other ‘prime’ lenders suddenly realised that they were lending to the wrong people…People who were struggling to repay their loans and this led to many lenders pulling out of the market and ultimately, making it almost impossible for someone with impaired credit to get a loan.
Of course, people with bad credit just don’t go away and they also need access to loans and finance, hence the birth of the guarantor loan.
Do Banks offer Guarantor Loans?
Unless something has changed at the time of writing this (September 2016) then the answer is no. Whilst back in the day, Building Societies and high street banks offered guarantor mortgages (and still do), for some inexplicable reason, they do not and have no plans to, offer guarantor loans.
GUARANTOR LOANS IN A NUTSHELL
A guarantor loan is simply another way of describing an unsecured loan where another individual with good credit, will guarantee to repay the loan should you not be able to. Whether it is a £10,000 guarantor loan or a £1,000 loan, they all work on the same basis.
Because the loan is unsecured, it means that if the loan is not repaid then the lender would not be able to repossess your home in lieu of the outstanding loan amount.
This type of loan allows the borrower (the one applying for the loan) to borrow an amount of money over a set period of time, even if they have a bad credit history because their loan will be supported by someone else with good credit (the guarantor).
The borrower can be a homeowner or a tenant (private or council) and the guarantor is usually a homeowner, although some lenders now allow tenant guarantors too.
Both the borrower and the guarantor must be able to prove something called affordability. This means that they must have enough income coming in each month to meet the loan repayments, after all of their outgoings have been taken into consideration.
Aged between 18 and 70 and must be working. If they have a lot of outgoings because of other financial commitments such as payday loans or car finance, then the guarantor loan application will usually require them to state that they are paying these other creditors back with the proceeds of their new loan.
A borrower must also have a bank account as the loan has to be repaid by Direct Debit as Standing Orders are not acceptable.
Usually aged between 21 and 70 but some lenders insist on a minimum age of 25. They must also be working and their credit must be classed as very good for the loan to proceed.
Just like the borrower, the guarantor must also give their full bank details as the money will be collected from their bank account should the borrower fail to make their monthly loan repayment.
THE APPLICATION PROCESS
After applying online with whichever firm takes your fancy, you will usually receive a telephone call from that particular lender.
They will run through a number of things with you, usually confirmation of information you have already provided but often they focus on what you need the loan for.
Assuming you meet the lending criteria, they will agree the loan and the money will be paid into your guarantor’s bank account, not the borrowers. The reason for this is that guarantor lenders like to use this as an extra layer of security as it has been known for a loan to go wrong because of fraud, without the guarantor knowing anything about it.
This way, the guarantor is fully informed and if it was fraud, they would be wondering why a lender suddenly deposited thousands of pounds into their bank account.
Can I find someone to guarantor my loan?
This is a question that is often asked by people applying for a guarantor loan.
The simple answer is no, however there are unscrupulous people on the internet who will offer to ‘guarantor’ your loan for you but you should simply avoid them. The only thing that will happen is that you will pay someone money to do this and then never see that individual ever again. Worse still, you will also find that the lender that you are placed with will also have trouble locating that person.
Point to note: Stay away from anyone who says they can guarantor your loan for you – it simply won’t happen.
Can you get 2 Guarantor Loans?
Yes you can. Like most unsecured loans (and secured finance for that matter) you can apply and be accepted for another loan on top of your existing guarantor loan but only if it meets affordability rules. In other words, if you were to get another loan, can you afford to repay two loans and still have money left over each month?
HOW DOES THE GUARANTOR FIT INTO THIS?
What is the guarantor’s involvement?
As you can see from the diagram above, a guarantor loan is totally dependent on the borrower finding a suitable guarantor.
Most people who apply for a guarantor loan do so because their credit history is not very good. CCJ’s, defaults, arrears and other late payments will stop you getting approved for a loan from any other mainstream lender such as a bank, building society or other type of lender.
The difference is that in this industry, whilst lenders will check the credit profile of their borrowers, importantly, they will not credit score them. This means that a borrower with a really bad credit history that has been declined by every high street lender, has a great chance of being approved for a guarantor loan and let’s face it, if guarantor lenders did credit score their applicants – no one would pass!
The other major benefit of this is that if the borrower continues to make regular payments on their loan, as per their contract, then this will be reflected in their credit profile and will show other prospective lenders in the future that you are a far better risk. As a reference point, lenders generally don’t like taking on risk so the more they feel you are a ‘safe bet’ to repay your finance, the better your chances are of being approved.
Will being a guarantor affect their credit profile?
The simple answer is no. That only applies though if the borrower makes their payments on time. The credit search that the lender will undertake will show up on the guarantors credit file but that is all. The only time this will change is if the borrower defaults on their payments continually and the loan reverts to the guarantor for them to make payments going forward. Then the credit file will show that they have a guarantor loan and normal rules apply – just like any loan.
LENDER V BROKER – WHAT’S THE DIFFERENCE
Not to put too finer point on it, money.
Whenever you use a broker, or credit broker as they prefer to be called, you will be charged a fee.
Most brokers will tell you that there is no difference and that if you go directly to a lender you will pay exactly the same amount as you would if you went through them.
Whilst it may be a case that brokers no longer charge the unethical upfront loan application fees of old anymore, it does not mean that they don’t get paid a fee by the lender for referring you to them.
If there is a fee, then someone will have to account it and that is usually the customer/borrower because this broker fee is added to the loan amount.
The other thing to note about going through a broker is that you are at risk of your details being sent all over the web. Many loan brokers arrange affiliate deals which means that once they have submitted your personal details to a lender, they will quite often also send your details to a multitude of other lenders.
This ‘throw enough mud at the wall and some might stick’ approach is fairly common but the downside for you as the borrower is that you will be inundated with text messages and phone calls.
Lenders are exactly what it says on the tin – they will lend you the money themselves. It also means that the decision on whether you will be granted a loan is theirs to make and theirs alone.
So if you do get declined, you will at least have some comfort that the information is straight from the lender and not a third party, so there will be no confusion.
We don’t receive a single penny from any lender mentioned on our site – take a look at how we get paid.
Never, ever pay any broker or lender an upfront fee for a loan. It doesn’t matter how convincing they sound – if it doesn’t go through (and it probably won’t), you will not get your money back.
It used to be that brokers and lenders were regulated and authorised to offer their credit services through the Office of Fair Trading (OFT) with a Consumer Credit Licence but they are now closed.
Responsibility for this now falls to the Financial Conduct Authority (FCA) which is a harder and more stringent process for brokers and lenders. Indeed, you cannot give advice or offer loan services unless you are authorised by the FCA.
Check the website details of every lender you approach and make sure they are authorised by the FCA to offer guarantor loans. If the information isn’t on their website, check their details directly on the FCA website. If you can’t find them on there, walk away and never deal with that company as it could be a scam.
INTEREST RATES AND APR
Guarantor loans are expensive when compared to traditional unsecured loans that you would get from a bank or building society but cheap(er) when compared to payday loans. Sometimes a guarantor loan is cheaper than extending your bank overdraft.
However, an APR of 70%+ is not uncommon for a guarantor loan.
The other thing to think about is this; Whilst APR gives an indication of the total cost of your borrowing, it isn’t the whole story especially if you are borrowing money over a shorter period of time, say 12 or 18 months. The biggest factor for you to consider is if the loan is affordable.
THE GUARANTOR LOAN SMALL PRINT
Guarantor loans can be a great way to get a loan when you have less than perfect credit.
However, if you have ongoing problems with money management and juggling your finances, a loan is not for you, even a guarantor loan because the chances are that you will default on the loan and have to rely on your guarantor to bail you out. Any loan is a short term fix and should not be considered an answer to your long term financial problems, particularly if the loan is to consolidate your existing debts.
That is not how they should be managed.
Your guarantor is only there for you if you really cannot repay the loan. There is a huge difference between not wanting to pay and not being able to pay and if you are the former, please do not apply for a loan.
If you do have ongoing problems with money, then contact one of the free debt help organisations for advice.
Make sure that you and your guarantor are in touch immediately the moment that you think you may have difficulty making a payment. This is because the lender will call the guarantor (even in work which can be embarrassing for them) to request immediate payment if they have been unable to get the loan repayment from you. This is the whole point of a guarantor loan.
Using work colleagues as your guarantor
Not a great idea.
Whilst there is no restriction on who can be your guarantor, (someone who is working, has good credit and good disposable income) the reality is that it should only be a very close friend or a family member.
The common scenario when using a work colleague as your guarantor is this:
Borrower applies for loan. Puts their best friend (work friend – there is a difference) as their guarantor. Borrower leaves that place of work and finds another job. Borrower and work colleague drift apart because work was the only reason they had to be friends. Borrower decides that they no longer want to pay their loan so stops making payments. Loan repayments fall to the guarantor (ex work colleague). Guarantor tries in vain to find the whereabouts of the borrower but as they only knew each other through work, fails to do so.
Believe us, that is not an uncommon occurrence.
PROS OF A GUARANTOR LOAN
- Borrower normally will not have to have a credit check or credit search against them
- It is an unregulated loan which means that none of your assets will be repossessed if you don’t repay the loan
- Borrowing can be done over a longer term than a payday loan, up to 7 years in some cases.
- The loan will not show up on the guarantors credit profile (MAJOR PLUS POINT)
- Even if your credit is very bad, you can still borrow with a guarantor loan
People with bad or poor credit are not going to go away and there will always be a requirement fro them to be able to borrow money at some point
Banks, building societies, price comparison websites and loan broking websites simply do not offer the ‘bad credit’ option that guarantor loan lenders do, which is why the rise of the guarantor loan product will only continue to grow in 2016 and beyond.