A guarantor loan is any where a guarantor agrees to take over payments if the initial borrower fails to pay. Continue reading more about these loan types.
How Do Guarantor Loans Work Exactly?
As mentioned above, with a guarantor loan, there is essentially built-in security for the lender. Not all lenders offer these types of loans, but there is definitely a market that seeks out these loans and lenders who fulfill this need for consumers. Usually, these loans are set up like other short term loans or personal loans, where a borrower gets a lump sum of funds and will need to repay them in monthly installments.
The application process for one of these loans is pretty simple; the primary borrower will have to find a loan and lender they want to work with, fill out an application, and provide some financial and personal information. From there, their guarantor will also have to fill out similar paperwork and provide similar information. Once the application is submitted, the lender will likely conduct a credit check on both parties and verify all the submitted documents. If the lender accepts everything and the loan is approved, the borrower and guarantor will have to review and be okay with the loan agreement. Once that loan agreement is signed, the primary borrower will get the funds and use them as needed.
The loan amount for one of these loans will depend on a few different factors, including the guarantor loan type, the lender, and the financial situation (credit file of both the primary borrower and the guarantor). Interest rates for these loans will vary on the finances of the borrower, guarantor, market conditions, loan type, and lender.
Who Can Be a Guarantor for a Loan?
Usually, a guarantor for a loan is a close family member or friend with whom there is mutual trust. However, when it comes to some business loans, the primary borrower may be the guarantor for their business. To be a guarantor, a person has to fulfill the following requirements:
Age Requirements
They must be at least 18 years old; however, some lenders may have an age requirement of 21 or 22, so ask your lender about specifics. They will need a government-issued Photo ID to prove their age and verify their identity.
They Must Have Residency Information
A guarantor will have to provide proof of residency which can be done through documents like a mortgage or rental agreement, utility bills, approved mail, or bank statements.
A Guarantor Must Have Income
A guarantor must have a source of reliable income and be able to verify that information which can be done through bank account statements, pay stubs, invoices, tax returns, etc. This helps give a lender an idea of whether the guarantor can make loan payments.
A Good Credit Score Requirement
A loan guarantor will need to have a good credit history/credit score. Lenders will look at various aspects of the guarantor’s credit history to determine approval.
Different Scenarios You’ll Find a Guarantor Loan
Here are some instances in which there may be a guarantor on a loan:
A Borrower Has a Poor Credit History and Needs a Loan Option
The most common scenario in which a guarantor will be involved with a loan is when a person looking for a loan option cannot qualify on their own. By adding a guarantor, a lender may overlook things like the primary borrower’s debt, poor credit score, and low income. A loan you may see as this example of a guarantor loan is a personal loan.
A Business Owner Needs a Business Loan and Doesn’t Have Business Credit Yet
Another scenario in which a guarantor loan may be present is when a business owner is looking to secure funds for their business but doesn’t have an established business credit just yet. By adding a personal guarantee, they may be able to secure a loan when they couldn’t have done so before. You’ll often see these when the business is set up as a sole proprietorship.
A Limited Guarantor vs. an Unlimited Guarantor
When looking at the roles of a guarantor, a person can be either a limited guarantor or an unlimited guarantor. The main difference between these roles is that a limited guarantor will not be responsible for the entire loan amount if the borrower defaults., while an unlimited guarantor will be responsible for the entirety of the loan balance in the case of default.
What’s the Difference Between a Cosigner, Co-borrower, and a Guarantor?
A cosigner and co-borrower are different from a guarantor, although they play similar roles in the loan process. A cosigner is a third party that can be added to a loan to increase the chances of approval or get a higher loan amount. In general, a cosigner will not be responsible for the loan until the borrower misses payments, which a lender can begin collecting at any time. While a co-borrower will be a joint applicant on a loan and will be responsible for half of the payment right away. With a guarantor, the borrower has to default and have no assets involved with the loan before the guarantor has to take on the responsibility of repayment.
Advantages and Disadvantages of a Guarantor Loan
There are definitely some advantages and disadvantages you should know about with a guarantor loan; here are some of the pros and cons:
Pros of A Guarantor Loan
- It can be an option for borrowers who cannot qualify for a loan on their own.
- Being a guarantor or adding a guarantor can help your credit score, depending on a few factors, including the payment record and existing credit portfolios.
- It may be used with a variety of lenders.
Cons of a Guarantor Loan
- There are huge risks involved for the guarantor if the borrower cannot repay the loan, they will have to. If their financial situation changes, then it may be difficult to do so.
- These loans can be more expensive when compared to a standard personal loan.
- Not everyone has the resources for a guarantor, and even if they do, asking someone to take on that financial responsibility can be awkward.