The unsecured personal loan market has experienced huge growth in recent times, as a host of new and accessible financial products have entered this space.
This is reflected by the figures, with a study by BBC News revealing that the value of outstanding personal loans in Britain has grown four-times faster than the national wage since 2013. Data published by UK finance also shows that households had outstanding loans worth £37 billion in 2016/17, as Brits become increasingly reliant on short-term borrowing.
Guarantor loans have become particularly popular in the current climate, primarily because of their flexibility and the fact that they’re available to applicants with a poor credit score. But how exactly do they work and when do you need a guarantor?
What is a Guarantor Loan?
While other personal loan applications will usually require a number of thorough checks and a positive credit score, several new products have been developed to help people with poor or limited credit histories.
Guarantor loans fit this description, as they’re structured to provide additional security to lenders and offset the risk associated with customers who have poor credit. This is because guarantors assume liability for the debt on behalf of the applicant, meaning that they’ll be required to repay the loan in instances where the borrower defaults on an agreement.
Guarantors will be known to the borrower, while they’ll have to sign an agreement that makes them fully liable for the repayment of the loan in the event of missed payments.
In this respect, the risk to guarantors depends entirely on the behaviour of the borrower, as they’ll face no action or charges if the loan is repaid according to the terms of the agreement.
From the perspective of borrowers, this makes credit far more accessible, although this type of agreement can place a significant strain on the relationship that you have with your guarantor if the loan is not repaid on time.
When do you Need a Guarantor Loan, and who Can Fulfil the Role of Guarantor?
Make no mistake; guarantor loans have made unsecured borrowing more accessible, and not only to those with a poor credit rating.
After all, people who have failed to take out credit in the past may also be denied a standard loan application, as lenders feel as though they cannot make an accurate decision without a clear history of borrowing.
This description could well apply to students and adults who are leaving home for the first time, and in this instance a guarantor loan could provide access to much needed funds.
On a similar note, young adults may also use guarantors to support mortgage or tenancy applications, as this provides reassurance to lenders and landlords who want to ensure that they receive their money on time.
In these situations, the challenge facing borrowers is finding a potential guarantor. While there aren’t many restrictions placed on people who want to serve as a guarantor, they’ll at least need to be a UK resident who is older than 18. It’s also important that they have a good credit history themselves, while they should be in full-time employment and be able to prove their ability to cover the cost of the outstanding loan.
Other than this, guarantors just need to understand the terms of the loan and be willing to assume responsibility for the debts. This is crucial, particularly as guarantors are likely to be relatives or close family friends who you share inextricable ties with.