A guarantor loan is a type of personal loan which is commonly used by those with poor or limited credit history. Whilst the individual may have been turned down by mainstream finance lenders, they can use a guarantor, a person that they know and trust to “co-sign” their loan agreement. For the lender, this gives a lot of security and credibility to the application and there is the added benefit that if the borrower cannot meet repayments, their guarantor will step in and repay the debt on their behalf.
There are around a dozen guarantor lenders in the UK, with Amigo Loans being the most well-known. The borrowing facilities range from £500 to £15,000 and are typically repaid in monthly installments over 12 to 84 months. There are around 53,000 guarantor loans funded per year and the industry is estimated to be worth around £150 million in the UK. (Citizens Advice Bureau)
Who to use as a guarantor
The most common and successful guarantor is a parent or sibling. This is someone who you know you can trust with your finances and be a constant in your life. Other guarantors that companies will recommend include friends, spouses and work colleagues. However, these people can come and go in your life – so if you have a loan lasting up to 7 years, you may not want to have someone that you could drift away from in a few years.
A key factor in selecting a guarantor is finding someone who looks like a good customer i.e has a stable income, employment status and most importantly, a good credit score. In addition, guarantor lenders will tend to prefer guarantors that are homeowners as it provides extra security since they could always raise additional funds if necessary whether it is through a second mortgage, selling or renting out their home. Plus, a homeowner has been previously demonstrated their creditworthiness in order to be approved for a mortgage and will be used to the regular monthly repayments.
There are a few select guarantor lenders that accept guarantors that are tenants or living at home. Lenders including Buddy Loans, Amigo and UK Credit offer something known as non homeowner guarantor loans.
How the application works
The application begins with an online application requiring the main borrower to provide their existing residential and employment information and include the information about their chosen guarantor. The lender will then do a check up on the guarantor including their employment, affordability and credit rating. In some cases, the information of the guarantor weighs up far more important than the initial borrower.
If the applicant is provisionally accepted, both parties will be required to “co-sign” a loan agreement which highlights the key loan terms and expectations. There is also a customary phone call from the lender to both parties to confirm that they understand the responsibilities and when the guarantor may be required to step in.
If successful, the funds are always sent to the guarantor’s debit account first. This is a simple security check so that the lender has peace of mind that funds are definitely going to a bank account with a good credit history. There is a ‘two week cooling period’ whereby the guarantor may decide to issue the funds to the main borrower or send the funds back to the lender without any additional fees charged.
If the customer ever defaults on a payment, there is a common misconception that funds are automatically collected from the guarantor’s account. However, this is not the case. The guarantor lender will always go through the customary routine of contacting the borrower first and giving them the opportunity to repay, only using the guarantor as a last resort.