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What Is a Guarantor on a Loan, and Is It Worth Involving One?

What Is a Guarantor on a Loan, and Is It Worth Involving One?
Kathryn McCoach

Kathryn McCoach

Some people struggle to get loans. Among the most common reasons are bad credit, low income, or the lack of credit history. However, there are ways to change the game. Adding a guarantor is one of them. They are financial helpers who can increase your chances of approval. But what is a guarantor on a loan? We'll explore guarantors' roles, their types, and the pros and cons of adding one to your application.

Key Takeaways

  • A guarantor agrees to repay a loan if a primary borrower defaults, reducing lender risk.
  • Guarantors' credit is only affected if a default occurs.
  • Guarantor loans are useful for people with poor credit or low incomes who can't otherwise get approved. They also help borrowers secure more favorable loan terms.

Table of Contents

  1. Credit Score Ranges: Is 540 a Good Credit Score?
  2. What's a Loan Guarantor?
  3. How Guarantor Loans Work
  4. Different Types of Guarantors
  5. Guarantors vs Co-signers
  6. Pros and Cons of Guarantor Loans
  7. Alternatives to Guarantor Loans
  8. Difficulties Associated with Surety
  9. Practical Advice to Borrowers and Guarantors
  10. Bottom Line
  11. FAQ

What's a Loan Guarantor?

Loan guarantors are individuals who agree to pay back the loan if the primary borrower defaults. This reduces the risks for lenders and makes an applicant look more reliable. Guarantors can help you qualify for a loan or get better loan terms if you have a bad credit score or a low income.

How Guarantor Loans Work

Guarantor loans work much like regular personal loans but give extra safety to lenders. Here's how they differ from conventional options:

  1. The loan application includes both a primary borrower's and a guarantor's information;
  2. A lender evaluates borrower's and guarantor's credit and finances and makes a decision based on the data received;
  3. Upon approval, both parties sign the agreement but the funds are transferred to the borrower. A guarantor can't access the loan money;
  4. Borrower makes regular loan payments. The guarantor is only responsible for repaying the debt if the borrower defaults.

Different Types of Guarantors

Guarantors vary in their roles and responsibilities. Some of them provide extra security when it comes to borrowing, while others act as a guarantee in non-loan contexts. Here are the most common types of guarantors:

Limited Guarantors

These guarantors agree to be responsible for only a part of the loan or are liable for it for a limited period. It's safer for them, but lenders might consider it risky and offer a primary borrower less favorable loan terms.

Unlimited Guarantors

These guarantors are fully committed. They have to be responsible for repaying the entire loan amount for the whole loan life if the borrowers fail to do this. While a guarantor takes on more risk, lenders tend to offer better loan conditions for the borrower.

Lease Guarantors

Lease guarantors are not for borrowing money, but for renting. They typically have equal responsibilities for monthly rent payments and utilities. You see this many times when young adults or students get their first apartment.

Certifying Guarantors

Sometimes, guarantors are more like personal references. They support someone's reliability instead of just their ability to pay back money. This pops up in job or passport applications.

Guarantors vs Co-signers

People often mix up these two roles, but they work differently. Both a guarantor and a co-signer help applicants obtain loans and can't access the borrowed money. Yet, they carry different levels of risk and credit consequences. Here's a closer look at how these two differ.

Guarantors:

Co-signers:

Pros and Cons of Guarantor Loans

Borrowers typically benefit from guarantor loans as this borrowing option may increase their chances of approval and improve their credit history. The interest rates on such loans might be lower compared to traditional options, which can make them cheaper in the long run. Still, a borrower may face damage in a relationship if default occurs. Additionally, not all lenders offer guarantor loans, which limits the choice and makes borrowing less accessible.

Guarantors are also exposed to serious risks due to the direct financial responsibility they take on. While the advantage lies in helping their loved ones get much-needed assistance, guarantors have to pay back the loan if the borrower cannot do it. This can create tensions between people involved.

The guarantors might also face limits on their own ability to borrow money later because lenders will look at the existing guarantor loan as part of their financial responsibilities. Additionally, the loan will show up on their credit report if the primary borrower defaults. This may affect a guarantor's credit score in case of late or missed payments.

Alternatives to Guarantor Loans

Adding a guarantor is not your only option. Consider these alternatives:

Secured Loans

Secured loans need some valuable asset like a vehicle or house to be eligible for the loan. This makes loans safer for lenders and can give good conditions for borrowers, even if the credit score is not high. If you repay on time, it can help your credit go up. But if you fail to pay back, you might lose the item used as collateral.

Credit Cards

Credit cards provide you with access to a certain credit limit. You can use the money within this limit when needed to cover various financial needs. If you repay the funds used within a billing cycle, you won't be charged any interest on the amount borrowed. Some issuers offer cards even to borrowers with bad or no credit.

Peer-2-Peer Lending

P2P lending allows borrowers to connect with individual investors via online platforms. These lenders look at risk differently than big banks as they are typically focused on your ability to repay the funds rather than your credit score. Thus, you might get approved for their loans even with less-than-perfect credit.

Payday Loans

Payday loans can come to the rescue if you only need a small amount to make it to your next paycheck. They allow you to borrow up to $1,000, depending on your state and income, and repay the funds within 2 to 4 weeks. These loans are available with any credit and involve no hard credit inquiry. Still, their APRs may reach three-digit numbers.

Difficulties Associated with Surety

Want to guarantee a loan? It's more than lending a hand. You're taking on serious risks. Here are a few considerations.

Your Own Welfare

Before you choose to be a guarantor, it's important for you to carefully examine your own money matters. Think to yourself:

Responsibilities

Being a guarantor is not simply an agreement made with a handshake. You are putting your name on formal papers, which means:

Personal Relationships

Money and relationships can be a tricky mix. Consider:

Credit Score Considerations

Although becoming a guarantor does not instantly change your credit score, it might influence it later own:

Practical Advice to Borrowers and Guarantors

If you think about becoming a guarantor or search for one, there are several important things to consider:

Don't Be Silent

Talk openly about what everyone expects, their money matters, and "what if" scenarios. Do not be afraid of difficult questions.

Read the Fine Print

Be certain you know the interest rates, repayment timelines, and all charges associated with the loan. If there is anything that seems unclear to you, contact the lender and ask about it.

Think Long-Term

Think about how this choice might influence your financial future. Will it affect your ability to get a home loan or pay for a car later?

Explore Alternatives

Guarantor loans might be useful, but they are not the single path to obtain the money you need. Check other choices to see what fits your situation better.

Get Professional Advice

You should talk to financial advisors or lawyers to fully understand what you enter into with a guarantor arrangement. This will help you protect yourself.

Bottom Line

Guarantor loans can be very helpful for people who want to obtain a loan but can't get it due to their credit issues or low income. But they also come with serious responsibilities and risks.

If you consider using a guarantor loan as a borrower, take your time and look at all aspects carefully. Think about other options available and assess your current financial situation and the ability to repay the funds. If you're thinking about becoming a guarantor, consider your long-term financial health and personal relationships with a borrower.

FAQ

Is a guarantor loan guaranteed to be approved?

Just adding a guarantor does not mean you will surely get a loan. Lenders still review both your and your guarantor's credit and financial details before making a loan decision.

Who can be a guarantor?

Guarantors are usually your family members or close friends. They also need to meet specific lender requirements.

How do you qualify as a guarantor?

To become a guarantor, you need to meet specific eligibility criteria, which may vary by lender. Age requirements start at 18, sometimes 21. Your credit score should be at least 670. You must provide proof of regular income and have a DTI of no more than 43%. Only US citizens or permanent residents can apply.

How much can I borrow with a guarantor?

The amount of the loan depends on the lender, your income, and the guarantor's financial situation. Generally, guarantor loans fall between $1,000 and $50,000. However, some lenders may offer larger sums to those with higher incomes and credit scores.

What if a guarantor can't make loan payments?

If neither you nor your guarantor can pay, both your credit scores will drop. You may also face legal troubles and be sued, which can result in wage garnishment. Therefore, you need to think twice before entering a guarantor arrangement.

Will being a guarantor affect my credit score?

Acting as a guarantor doesn't impact your credit score unless the borrower defaults. If it happens, the loan will show up on your credit report. Since then, both your on-time or late payment will affect your credit score.

Can I change my mind about being a guarantor?

Once you signed the agreement, changing your mind is not possible since your credit and financial details had an impact on the loan approval.

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