Getting a loan can be a difficult process for some people, especially if they have a history of bad credit or have no credit history at all.
A guarantor loan can be the way out; as it can assist you to get the money you’re in need of, even in instances when you can’t get credit in your name alone.
The idea is that a person you trust – typically a friend or a relative agrees to stand in as a guarantor for you. That person promises to cover your loan payments if you fall behind.
Guarantor loans are not something new; that was how banks use to lend before the introduction of computer credit scoring; so it is a system that is trust-based.
How to protect yourself as a guarantor
Being a guarantor for someone should be taken seriously; it is riskier than giving a character reference. Have it at the back of your mind that if the borrower fails, it is legitimate for the lender to come after you.
When standing in as a guarantor, ensure you get a copy of all documentation involved, so you know the lender’s payment schedule. Also get a copy of the written and signed guarantee contract. Get these copies at least 15 days after they’ve been signed. In an instance when the applicant fails and the lender comes for you, ensure they send you a copy of the repossession notices.
Pros and cons of guarantor loans
Even though guarantor loans are the best alternatives for those having no credit history, that doesn’t mean there are no disadvantages. Here is a look at the pros and cons of guarantor loans.
• The interest rates are cheaper
• Most of them offer flexible terms of repayment
• You can borrow a larger amount
• The guarantor will be required to pay off the loan if the borrower fails. Before contacting the guarantor, the lender will make all efforts to get the payments from the borrower.
• In the event of default, it can lead to credit score problems for both the borrower and the guarantor. The implications of a guarantor loan can be worse than just cash. If the lender fails in collecting payments from both the borrower and the guarantor, it will affect their credit ratings.
• It can lead to broken relationships: This is probably the ugliest cons of a guarantor loan. Problems can arise, mentally, financially and emotionally if the applicant fails to fulfil their promise.