A guarantor loan, in principle, sounds like a great option. Somebody close to you that you trust acts as security for you borrowing money. They sign some paperwork and you get much needed funds. Everybody’s happy. Unfortunately, it is not that simple, and such a deal has many a downfall. Moolr took a look at why you should avoid guarantor loans. Please note however this article looks at the downsides, but we do not say you should never use them as a fact. Guarantor loans still have their uses for some – just be wary. Be fully aware of what you are getting into before proceeding.
The problem for some guarantors is knowing, or not knowing, what they are signing up for. Many report that many signed forms expecting themselves to be a character witness, and nothing more. Some had not had the process explained to them fully, and had been deceived. They were not aware that their own assets were at risk. The moment a guarantor signs on the dotted line, it means one thing. They are responsible for the loan.
If the borrower fails to make a payment, the loan company won’t bother chasing them. The fact they are taking such a loan means they may have expected such a problem. No, they will head for the guarantor. They are seen as the person who is better off and so are a far easier target.
You may think that with potentially two people who are able to make payments, loan companies may offer a competitive interest rate. Sadly that is not the case. Guarantor loans generally come with an interest rate north of 35%. Consider that many companies offer a loan around the 3-10% mark, this is incredibly high.
Let’s look at an example. Compare the cost of a £4000 loan over three years:
There are some if you look hard enough. Like any loan, if you make regular repayments, you may well help improve your credit score. Also, if this is your only option and you are comfortable with repayments and have a trust with a friend or relative then it may be worth the cost. That depends on your personal circumstances. Also, your guarantor must be fully on board with what is involved. There are however better ways to improve your credit rating than guarantor loans.
The fact is that if you are struggling to source mainstream loans, then this probably tells a story. Namely that it is best that you do not borrow further. But if you must borrow, there are better options out there.What’s more, asking someone close to you to act as a guarantor not only puts pressure on them but could put a strain on your relationship.