Who Can Be A Guarantor For A Loan?

Getting a loan can be challenging, especially if you have a bad credit history. In this condition, you may only get a loan with collateral, high income or a guarantor. A guarantor is the most popular choice for individuals facing credit issues.

It reduces the risks for the lender and the borrower alike.  Moreover, providing collateral or improving income is challenging—one fears staking precious possessions for minimal cash. Alternatively, boosting income prospects requires time. When you need instant cash with minimal hassle- a guarantor-based loan helps.

Who is a guarantor?

A guarantor is a person close to the borrower or a family member. He helps the borrower pay the dues on a loan. He is liable to do so if the primary borrower cannot.

If someone agrees to be a guarantor, he must sign a guarantor agreement alongside the borrower. It states that the guarantor will pay the dues if the borrower can’t.  One can be a guarantor if he trusts the borrower.

How does a guarantor-based loan work?

A guarantor loan is a facility that helps an individual qualify for better rates. It is ideal for individuals with bad credit scores struggling to get a loan. Under this, a loan provider considers the borrower and the guarantor’s credit score and income profile. The combined income and credit score improve the repayment potential. It helps a borrower fetch a higher amount at low interest rates.

After applying as a guarantor, you can’t break the agreement. The loan provider would not remove you unless there are severe circumstances like unemployment or business loss. Additionally, a guarantor only enters the frame if the borrower can’t pay. It implies that if the borrower pays without skipping, a guarantor need not pay.

When should one seek a guarantor?

One should not apply for a loan with a guarantor unless asked to do so. The loan provider analyses the finances and credit. It helps them understand whether a guarantor would help or not. Here are some situations when you may need one:

• Your credit profile reveals debts, CCJs, bankruptcy,
• not have a credit history at all
• Need a higher amount than what you qualify for
• You are unemployed or have an extremely low score
• Wants to reduce the overall loan costs, repayment amount and interest rates
• Have someone to trust with finances

Who is eligible to operate as a guarantor on a loan?

Anyone with a good credit score and a decent income can be a guarantor. This means a person with a credit score of 881-960 can be a guarantor. The guarantor has low pending debts and well-managed financials.

It’s generally a parent or a spouse having separate bank accounts. Here are other criteria to be a guarantor on a loan:

• Should be aged 18-75
• Must be a UK citizen
• Must have a valid country bank account
• Share close ties with you – brother, mother, spouse
• Should be a homeowner
• Must have a decent income exceeding £20000/month

Individuals with a home or property ownership qualify as guarantors quickly.  Moreover, the guarantor and the borrower must not add a joint account to get the loan. They must hold bank accounts separately.

What are the Pros and Cons of operating as a guarantor on a loan?

As a guarantor, you may help someone struggling to qualify for a loan. It helps improve the bond you share. Additionally, you can help the other person or the borrower build up a healthy credit score. However, if the borrower defaults, it may impact your credit score as well. You should pay the outstanding balance as a guarantor if the borrower fails. Here are other advantages and risks of being a guarantor on a loan:

Pros of operating as a guarantor	Cons of operating as a guarantor
You may help the person or the borrower qualify for better interest rates	You are legally entitled to pay if the borrower can’t
Improve your credit history or score if the borrower and you pay the loan timely.	If the borrower defaults on the payments, it may hamper your credit score as well
Improves your relationship with the primary borrower	The loan provider may take you to court if you don’t pay the debt, as you share the liability for doing so.

 

Now, let’s view the pros and cons of having a guarantor. Individuals with low credit scores, seeking guarantor loans need to know this:

Pros of having a guarantor	Cons of having a guarantor
A loan with a guarantor may help you qualify for the loan quickly.	If the person who agrees to pay the dues on your behalf cannot pay, you must pay the dues.
It helps you fetch lower interest rates and comfortable repayment terms	Meeting the guarantor’s liability too may impact your budget and finances
Grants you the flexibility to borrow a higher amount and pay dues timely. It improves your and the guarantor’s credit score	Non-repayment may lead to default and impact your and the guarantor’s credit score.

How to boost your credit score if it drops significantly?

As mentioned above, a loan default impacts the credit score of the borrower and the guarantor, respectively. It affects your credibility in qualifying for affordable loans, credit cards, and even rentals. Here are some ways that may help improve your credit score quickly:

1) Manage current account with an agreed overdraft

Having a personal or business current account may help you with credit improvement. It is ideal for individuals with no credit or transaction history. Just make sure there is enough money in your account to cover payments. Additionally, using an overdraft facility may also help your credit score over time.

2)  Include extra information on a credit report

Adding additional details like- electoral roll, current address, and rental payments improves credit score. Yes, adding rental payment history as a tenant may help you fetch a loan. It may help you fetch one that is in better interest as a regular rent-payer. It reveals responsible behaviour towards the liabilities.

3) Utilise unsecured loans to your benefit

Yes, some unsecured or personal loans may help you improve your credit history. For example, if you use a credit card for your needs, replace it with personal loans. It is because these loans impact your credit score more positively than credit cards. Additionally, the costs you pay are lower than the credit card bill. Making payments continuously on a long or medium-term personal loan may boost your credit by a few points.

Bottom line

Thus, a guarantor can be someone close to the borrower with a decent credit history and income. He may help a person needing instant cash exceeding £10000 affordably.  One may consider a guarantor if you need more money despite a poor credit history. Making regular payments on the loan as a guarantor and a borrower may boost the credit score.

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