When Should You Opt For A Guarantor Loan?

by Evan

Finding yourself in financial difficulty is never easy, particularly if you have been rejected by a number of major lenders for your chosen line of finance. However, with the help of a guarantor loan, you can get the finance you need and begin paying it back in full. But when is the best time to apply? In this article, we will be looking into when you should opt for a loan such as this and how it can benefit you in the long term.

What Is A Guarantor Loan?

A guarantor loan is a long commonly taken out by those that are struggling to get a traditional loan a bank or other traditional method. This is usually down to the current state of your credit score as this could be to poor for you to be eligible for a loan in a traditional manner. This is a loan type typically for those with bad credit as the guarantor takes responsibility for any missed repayments and is putting themselves down to pay back the loan should the borrower not be able too.

What Are Guarantor Loans Used For?

If you are someone that has been suffering from a poor credit score for a prolonged period, then a guarantor loan could help to build it back up. Though this will require you paying back each repayment on time with no delay, each good mark will help to strengthen the credit score over time, but what are they commonly used for?

There are a number of benefits to guarantor loans, for example, helping a start-up business or a first-time homeowner. Though this is a risk to the guarantor, this helps to fund the business or homeowner and allows them to pay it back over monthly instalments. This can then provide the funds needed to get out of financial difficulty with the added security that they need, all whilst helping to rebuild a credit score with monthly repayments that are paid on time and in full.

How Do They Work?

Similarly, to that of an unsecured loan, a guarantor loan provides the funds to someone who’s previous application for alternative finance may have been turned down due to their credit history. In order to qualify for the funds needed a guarantor will be needed to take on the loan should you not be able to pay it back in full. This will, therefore, mean that any default payments will be the responsibility of your guarantor until the loan is paid back in full.

How Do I Qualify As A Guarantor?

In order to qualify as a guarantor for someone, you must be a friend or family member and cannot be connected to you financially, therefore partners or spouses do not count. In addition to this, you will also need to be over 21 years old with good credit history and financial stability as this as a large commitment to take on. There are also a number of elements to consider before you decide to be a guarantor for someone such as whether or not they are responsible or is they have a low salary with no current employment as this can lead to you taking on these repayments.

The Benefits Of Guarantor Loans

Though this may seem like a big commitment for both the borrower and the guarantor at this time, there are a number of benefits that come with this loan type. Whether it is the ability to boost your credit score, or it is the quick acceptance rate for a loan such as this, we have listed some of the key benefits below:

Poor Credit Is Not An Issue – Due to the guarantor taking most of the responsibility for any missed repayments there is a higher acceptance rate for those with poor credit. However, there are credit checks before the approval process that are used to assess whether the guarantor or the borrower can afford to pay back the loan in full.

Quick Approval – In addition to the high approval rating for those with bad credit, there is also a quick online approval rating. This gives you the funds that you need quickly to help you out of financial difficulty.

Can Span Over 5 Years – Due to the longer borrowing time you can borrow between £1000- £15,000 with a guarantor loan. This is beneficial for those looking to get on the housing ladder or even purchasing a car to get yourself out of difficulty.

You Can Boost Your Credit Rating – By paying back your monthly repayments on time can help to repair a poor credit score over time. In addition to this, a number of lenders offer the option to repay their loan early or even make overpayments to pay the loan off earlier than expected which can also have a positive impact on your credit score.

Will They Affect My Credit Score?

Whenever you take out a loan it will affect your credit score, but the way in which you pay back the loan will determine whether or not it is a positive impact. If you take out a loan and default on a number of payments, this can lead to your credit score being negatively affected. However, paying the loan back early or meeting all the repayments on time can positively impact your credit score and increase your chances of being accepted for financial aid in the future should you need it.

How Do I Apply?

Applying for a guarantor loan is easy, all you have to do is apply online. During this application process, you will then be required to provide financial details as well as personal details such as name and date of birth. This information will also be required from the person who is signing with you to be your guarantor. In order to apply for a loan, you are required to be 18 or over with a bank account and in employment of some kind in order to pass the eligibility checks. In addition to this, the guarantor needs to be at least 21 years old with a good line of credit to ensure that one of you are able to pay back the loan monthly until it is fully paid off.

During this time many lenders will conduct a hard and soft inquiry, these checks, as well as checks into your guarantors’ line of credit, will then determine whether or not you are eligible for this form of loan. A soft inquiry is often conducted first and is the process used during the pre-approval stage, a hard inquiry is then conducted to look further into your credit history to ensure that you are indeed eligible for a loan such as this. This approval process was implemented by the financial conduct authority to ensure that all customers are treated fairly and given the same chance at being accepted for this form of finance.

What is A Soft Inquiry?

When you apply for a loan, the first step is the pre-approval process. The inquiry conducted at this time is a soft inquiry which just looks into your initial credit score. This is a tool used by lenders to quickly determine whether or not you are eligible for a credit card or loan. This is a three-digit number beside your name that indicates your eligibility and can be affected by late payments and debt as well as court rulings or other legal actions taken against you. This style of enquiry does not appear on your credit score and can be checked either by you or by a lender during the pre-approval process.

What Is A Hard Inquiry?

A hard inquiry, however, is a check that can appear on your credit score for 2 years after the inquiry. This is a check that can negatively affect your credit score should you have too many and can also lead to a number of lenders turning you down. If there are a number of hard inquiries visible on your credit score, this could indicate to lenders that you are poor at managing your finances. This can affect both you and your guarantor and can lead to you being rejected for a loan in the future. Whether this is for a guarantor loan a mortgage or even a bad credit loan, too many hard inquiries can affect your ability to qualify for a loan such as this.

With this in mind, there are a number of reasons to opt for a guarantor loan when looking to get yourself out of financial difficulty, however, it is important to consider the lender and the average APR as this can reduce your chances of being able to pay back your loan on time every month in full. However, by conducting research beforehand with your guarantor and comparing prices, you can find the perfect loan for you that is affordable for you to pay back in the long term without putting you both at financial risk in the future.

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