How to get a loan with a guarantor?
A guarantor loan offers the opportunity for affordable credit to those who have a less than perfect credit history.
There are a number of helpful areas to think about before taking any steps to get a loan..
The following article discusses five things to think about.
1. You need a guarantor
This might seem obvious, but you will need to find someone to guarantee your loan before you can apply.
The reason that lenders can afford to offer better interest rates than other ‘bad credit loans’ is that they are looking at the credit history of your loan backer and not you, someone with a clean credit history.
The most common guarantors are close family members, such as a parent, grandparent or sibling. At the time of writing one lender also allows your husband or wife. Close friends are also commonly guarantors.
The best people are those who know you well and trust you.
2. The worst that could happen?
We always suggest starting off knowing that ‘worst case’ scenario; then so long as you have that covered, you stand in good stead moving forward.
The worst case scenario is that you are no longer able to pay the monthly payments, either for a limited period or longer.
In this case, your loan backer WILL be required to pay the loan for you. If they do not, then missed payments will show on their credit history.
If they do not make any of the payments, then recovery action will be taken out against them and you.
This would damage your relationship and their credit history.
So long as before you take out any loan you take steps to absolutely make sure that the loan is affordable to you and your loan backer then this worst-case scenario should never arise.
3. How to avoid the worst case scenario?
The key when taking out any loan is to make sure that you can comfortably afford the monthly repayments.
So it is worth sitting down and writing down your monthly income and expenses, to work out if there is any spare cash that you can use to make your loan repayments.
The Citizens Advice Bureau provides an excellent Budget Sheet which you can fill out and calculate what you can afford.
There is a natural tendency with most people to underestimate how much things really do cost and what they spend their money on. For example, omitting the £10 a week they may spend on coffees or £30 in the pub. You should allow yourself some leisure money otherwise your budget may be unsustainable.
So please be honest with yourself when you do this exercise, work out what you genuinely can afford before you even start thinking about the size of loan.
To estimate your monthly loan repayments, please see our Loan Calculator further down the page.
4. How to put your guarantor at ease?
When someone guarantees a loan they will be worried about the situation of non-payment, even if they do not admit it.
They may be agreeing to do this to support you and because of your relationship, but it is worth spending some time reassuring them (think what you would want if you were in their shoes?).
We suggest the follow the following steps:
a. Be transparent about how much you can afford
It is worth being ‘open book’, and showing them that you have spent time calculating your income and expenses and that you can comfortably afford the monthly repayments.
b. Have a good reason for having the money
If your reasons for the money are sensible, then this will sit much more comfortable with your loan backer.
c. Only borrow what you need
Even if you can afford the monthly repayments for a loan which is larger than you need it may not sensible to do this. Loans cost you money and minimising interests costs will help you to get back on to the road to a future clean credit history.
5. Get multiple loan costs?
It is very worthwhile shopping around to get the best value loan as this could save you money.
Different lenders have different rates depending on your status, how much you borrow, and for how long.
It is therefore advisable to look at the different loan costs from different lenders and decide on the best one for you. Quickly compare loans and get quotes using our compare loans table.
For further reading see Payday loans: From specialist cards to credit unions, there are better options - The Independent. 2015-10-31