Seven steps to get your guarantor loan

apple-589640_640You may have slipped up with your finances in the past and are now struggling to get a loan because your credit record is impaired. Or perhaps you are new to borrowing and you having difficulty demonstrating a history of responsible financial management. Either way, you could be left facing rejection after rejection when applying for a loan.

This could be because many lenders, and especially those who specialise in personal loans which are not backed by any kind of security, view you as a greater risk than somebody with a good record of managing credit. But don’t despair, there are other options – particularly guarantor loans – which could help you to still make that big purchase, redecorate your house, take a holiday, finance a car or consolidate your existing debts into one.

Guarantor loans make up the fastest growing sector in the UK credit market currently and provide a good way for those who have made financial mistakes to get back onto the credit ladder and repair their records. If you have been turned down for a loan by your bank or one of the other mainstream lenders, guarantor loans could offer you a way to avoid the particularly tight credit scoring systems used by the big banks to exclude people who may only have a few relatively minor slip ups on their records.

A guarantor loans works by using the good record of a third party to act as security for a borrower when he or she takes out a new loan. While the term ‘security’ infers some degree of risk, it’s important to note that this does not mean the guarantor having to put up their home to back the borrowing. It simply means that this person guarantees that the loan will continue to be repaid in the event that the borrower gets into trouble and is unable to make repayments.

This is not a new form of credit, even though the name may be unfamiliar and despite its recent surge in popularity. Until the liberalisation of the UK’s consumer credit market in the early 1990s, it was standard practice for a lender to ask for a third part to guarantee the borrowing of a new applicant, particularly where that person did not have a long record of borrowing money. Guarantor loans work on exactly the same principle, and often come with lower interest rates, larger amounts and longer to repay than other forms of credit including personal and payday loans.

 

But how to do you go about getting a guarantor loan?

  1. Find your guarantor. This is not as difficult as it might sound. You need to find somebody who trusts you and who you are happy to disclose your financial affairs to. That person will also need to have a good credit record because the lender will not be worrying so much about your financial history but will be interested in that of the guarantor. The loan company will want to see that he or she has a good credit history, has paid their bills on time regularly and does not have anything adverse registered against them like defaults or county court judgements (CCJs).
  1. Make sure you aren’t in an existing financial relationship. The lender won’t care whether your chosen guarantor is a friend, a family member or even somebody you work with. But it will be concerned about any financial links between you. The guarantor cannot be somebody you have hold a joint financial product with (like a bank account or mortgage) and they cannot be your partner.
  1. Make sure the guarantor is happy. The guarantor is putting their record of sound financial management on the line so that you can get access to the credit you need. That means that they are going to want to be satisfied that you can afford the loan and that you are committed to keeping up with the repayment schedule. Where family is involved, financial problems can wreak havoc with relationships so while it is only natural for a parent to want to help out a son or daughter in difficulty, the guarantor should still satisfy themselves that the borrower is committed to being open about their finances. If the borrower cannot keep up with repayments, then this will pretty quickly impact upon the guarantor. He or she will have to act rapidly to make good any shortfall to avoid finding their credit record suffering. In cases where the guarantor does not step in and the borrower makes no attempt to put matters right, then the lender will be able to chase the guarantor for money. As a last resort, this might include ordering the guarantor to repay the entire loan and any interest due on it.
  1. Make sure you have an agreement with the guarantor. This is not an arrangement to enter into lightly so it makes sense to set out what is expected of each party in the relationship. Some lenders advise that the applicant and guarantor draw up a written agreement which lays out exactly what is expected of each. A guarantor might want the applicant some to make some form of full financial disclosure which shows a complete breakdown of income and expenditure before they sign the agreement. The guarantor may also need a commitment from the borrower to provide updated financial information for as long as the loan’s lifetime so that he or she gets early warning that a repayment might get missed.
  1. Make sure you are up to date with everything else. While the lender may not be so concerned with your credit record, as a borrower it makes sense to ensure your other loans and credit cards are up to date so that there is not a last-minute hitch with your application. There is a small possibility that the lender will look at your credit record and you may encounter problems if you have a particularly poor history of CCJs and defaults.
  2. Do your homework. While it’s not that different to any other loan, it’s worth doing thorough research to find the loan that you want, offering the amount you need, at an interest rate you can afford and with a repayment schedule that suits you. Making sure you shop around before applying will help prevent problems later on.
  1. Apply! When you’ve settled on the right loan, make the application and you’ll know – in most cases – whether you’ve been accepted within hours.

Article provided by Mike James, an independent content writer working together with Solution Loans, a technology-led finance broker with many years’ experience in advising clients of their most suitable types of credit.