Tips and Advice

What are guarantor loans?

Need a loan to buy a car? We explain how guarantor loans work

A guarantor loan is similar to a standard unsecured personal loan, but involves an additional party to the agreement. That person acts as a guarantor, agreeing to make the monthly repayments if at any point during the loan term the primary borrower can’t afford to pay them.

If you’re young, have just passed your test and want to buy a car but don’t have the cash, a lack of credit history may affect your chances of getting a loan. Similarly, if you have a bad credit rating and are trying to get a loan in order to pay for a car, you may also find it difficult to find a willing lender. In these cases, guarantor car loans may be the answer.

How do guarantor loans work?

Guarantor loans for bad credit or a lack of credit history are different from a normal loan in that they require the borrower plus the person acting as guarantor to be assessed and credit-checked before the lender agrees to the loan.

Very often, a lender will want the guarantor to be over 21 and own property, as opposed to a non-homeowner. The guarantor also has to be someone with whom the borrower doesn’t already share finances.

The lender will assess the borrower’s ability to make the monthly repayments regardless of how much the guarantor earns, but the loan is more likely to be approved if the guarantor has a secure job, high salary and a good credit rating.

The other main difference is that the loan provider will pay the loan to the guarantor not the borrower. This gives the guarantor a final chance to change their mind and send the money back if they wish. It also allows them an element of control as to how the borrower gets the money i.e. as a lump sum or in instalments.

Guarantor loan problems

Even more so than a standard loan product, a guarantor loan should be considered very carefully by both parties involved. While the rates of interest aren’t as high as on some payday loans, they are usually between 40-50% APR and unlike payday loans that were regulated relatively recently so that you can’t pay back more than twice the loan value, guarantor loans can end up costing more than 100% of the original sum because of interest. There are simply no low APR guarantor loans around.

The other main thing to consider is the potential strain such a financial arrangement puts on the relationship between the borrower and the guarantor. If the borrower fails to make a monthly payment or defaults on the loan completely, it falls to the guarantor to foot the bill and this is likely to be a problem in most circumstances. If the relationship between the two parties sours for extraneous reasons, the loan arrangement would still be in place and could be used as tool in a wider dispute, e.g. the borrower refuses to make loan payments so the guarantor has to pay instead.

If you urgently need money to buy a car but suffer from a lack of, or bad, credit history, which prevents you from using normal payment methods such as PCP finance or a standard loan, a guarantor loan may be worth investigating. The interest rates are very high but if you have no other option, they can at least be a good way to improve your credit score if you keep up the monthly repayments.

If you're looking at finance methods for the purchase of a new car, take a look at our article on the other various deals and options available here. We also have articles on finance for used cars and the best cars to buy for under £150 per month.

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