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If you have poor credit or no credit, it can be very difficult to get a loan. Lenders want to see that you have a track record of paying off your debt, and without it, they may consider you too risky as a borrower. However, a guarantor loan could help. These loans allow a third party, such as a family member, to take responsibility for the debt in case you can’t repay it. While guarantor loans can be a good way to secure a loan, there are risks for both the borrower and the guarantor. Here’s what you need to know about guarantor loans.
How Do Guarantor Loans Work?
Guarantor loans help people with poor or no credit secure a loan, such as a type of personal loan, a mortgage, or an auto loan. Typically, the guarantor has a stronger credit history than the primary borrower, which helps them qualify for a loan. Once the loan is approved, the primary borrower will begin to pay it off. But if they can’t, the guarantor takes responsibility and steps in to repay the loan instead. You may be wondering, “what is a guarantor for a loan?” Guarantors are usually close friends or family members with a good credit history and a steady income. That said, they can be anyone who meets your lender’s loan eligibility requirements. A guarantor may sound similar to a cosigner, but there are some key differences between a guarantor vs. a cosigner. A cosigner has equal responsibility for repaying a loan. If the primary borrower fails to make a loan payment, the lender may come after both the primary borrower and the cosigner. With a guarantor loan, the guarantor is liable for the debt only if the lender has pursued every possible avenue to get payment from the primary borrower. That means guarantors have less risk than cosigners.Recommended: Defaulting on a Personal Loan: How to Avoid It
Guarantor Loan vs Personal Loan
Guarantor personal loans function a lot like traditional personal loans. They allow you to borrow a lump sum of money that’s distributed to you via check or direct deposit. You can use these funds for any purpose, as typically spelled out in the loan agreement. Once the lender issues the loan funds, the primary borrower will begin paying it back in monthly installments with interest. Lenders may consider guarantor loans riskier than their traditional counterparts, so interest rates may be higher. If the primary borrower doesn’t make the loan payments, the guarantor is legally obligated to do so in their place.
Getting a Guarantor Loan
It’s wise to shop for a guarantor loan with the lowest interest rate and fees and the best terms. When you find a loan that suits your needs, you, as the primary borrower, and your guarantor will need to apply for the loan together. Your lender will look into your finances and credit histories. Each lender will have their own specific set of eligibility requirements.
Guarantor Loan Criteria
In order to qualify for a guarantor loan, you may need to meet the following eligibility requirements:
Guarantor.A guarantor in good financial standing who is willing to take on some financial risk to help you secure a loan is the first requirement.
Credit Score. The primary borrower on a guarantor loan may have low or no credit, but the guarantor will likely need a high credit score to qualify.
Income. The guarantor will also need to demonstrate that they have steady employment and income to pay off the loan if the primary borrower cannot.
U.S. Residence.Both parties will likely need to live in the United States to obtain a loan.
Age.Both parties will typically need to be at least 18 years of age.
Guarantor Loan Consideration
Before taking out a guarantor loan, it’s important to consider the risks. If the primary borrower fails to make payments, the guarantor will have to do so. What’s more, if the guarantor can’t make the payments, the loan could go into collections and have consequences for the guarantor as well as the primary borrower. The guarantor’s credit score will also take a hit, which can make it more difficult and expensive for them to secure credit in the future.
Pros and Cons of Guarantor Loans
To help decide whether a guarantor loan is right for you, weigh the advantages and disadvantages.
Pros of Guarantor Loans
Cons of Guarantor Loans
• Can help borrowers with low or no credit secure a loan.
• The guarantor is responsible for payment if the primary borrower doesn’t pay. If the guarantor fails to pay, the lender may take action against them, which could negatively impact their credit score.
• Guarantor loans may have lower interest rates than other forms of credit, such as high interest credit cards or payday loans.
• Guarantor loans may be more expensive than their traditional counterparts, since lenders may view them as riskier
Alternative to Guarantor Loans
If you can’t find a person to be your guarantor, or you feel uncomfortable asking anyone to take on that risk, there are other options that could help you secure and build credit. For instance, you may begin to build your credit history with a secured credit card, which allows you to pledge collateral, often in the form of cash, in exchange for credit. Building credit can improve your chances of securing future loans. You might also consider a flex loan, which is an open line of credit. Flex loans may be secured loans backed by pledged collateral, or unsecured loans that are typically based on the borrower’s credit score and income, among other factors. Flex loans allow you to borrow up to a certain limit; as you pay off your bill, you can borrow again. Another option is to get a loan from a friend or a family member, but be aware that with a family loan, there may be complicated tax implications for the relative who lends you money. If your family member charges you interest, they might owe taxes on their earnings. And if they don’t charge interest, they may owe taxes based on what the IRS thinks they should have charged. Check into this first to make sure a family loan makes sense for you. It’s also important to understand that this type of loan can strain family relationships. Put the terms of a family loan in writing, and make sure you can repay it as agreed. A family loan will not help you build credit, which may be another important consideration for you.
The Takeaway
A guarantor loan may be right for you if you’re building your credit and don’t yet qualify for a loan on your own. However, it’s critical to understand the potential disadvantages and risks to you and the guarantor. Because they are riskier to lenders, guarantor loans may be more expensive than traditional loans, such as personal loans. That makes it important to shop around and compare options from different lenders.
3 Personal Loan Tips
Personal loan interest rates vary from lender to lender, but generally depend on your credit score. With one online application, Lantern by SoFi makes it easy to find and compare the personal loan interest rates that you qualify for.
Read lender reviews before taking out a personal loan. You’ll get a sense of how long it can take to receive the funds and how good the customer service is.
Watch out for lenders who advertise “guaranteed” loans. Legitimate lenders will want to know your creditworthiness before offering a loan.
Frequently Asked Questions
Do any banks offer guarantor loans?
Are guarantor loans cheaper?
Are guarantor loans guaranteed?
Photo credit: iStock/Kateryna Onyshchuk
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About the Author
Austin Kilham
Austin Kilham is a writer and journalist based in Los Angeles. He focuses on personal finance, retirement, business, and health care with an eye toward helping others understand complex topics.
