If you have poor credit, you may have trouble qualifying for a loan. Why? Lenders want to see that you have a strong credit history before lending you money.
So, what options do you have if your credit isn’t so hot? One good option is a guarantor loan. Read on to learn more about guarantor loans, as well as the pros and cons you should consider before applying for this type of funding.
What is a guarantor loan?
A guarantor loan is a type of loan where a “guarantor” backs the loan and is responsible for payments in the event that you end up defaulting on the loan. When a guarantor is co-signing the loan and held liable for the debt, it minimizes the risk from the lender’s point of view.
Giving a loan to a person with poor credit can be seen as a high-risk venture for lenders who want to ensure they will get their money back. For this reason, giving a loan to a person with poor credit with a guarantor – who can be held legally liable in case of non-repayment – is a much more sound investment. After all, lenders are in the business of giving out money and getting a return on their investment. Plus, a guarantor can help a borrower get approved for financing.
Reasons you might need a guarantor
If you need financing, you probably want to get approved for a loan on your own. But there are various reasons you might get rejected and need a guarantor to improve your approval odds. Here are some reasons you might need a guarantor:
- You have poor credit. If you have poor credit and a history of missed payments or high credit utilization, it can make you a less desirable loan candidate. If you have applied for too many lines of credit in a short period of time, this may also be a red flag as lenders may deem you an irresponsible borrower who relies heavily on credit.
- You don’t have an established credit history. It’s not just bad credit that can get you rejected. If you don’t have a verifiable credit history, you pose a risk to a lender. If a lender is unsure whether you can make payments on time, you may need a guarantor. Your credit report and your credit score illustrate your “creditworthiness” — or how eligible you are for credit and the likelihood you’ll pay back your loan. If you have nothing to show, it can be difficult for a lender to trust you and lend you money.
- Your income is too low for the amount you want to borrow. Some lenders may look at your income to verify that it can support the amount you are borrowing. If your income doesn’t meet the lender’s criteria, you may be rejected and need a guarantor.
Regardless of the reason, having a guarantor can help you get approved for the loan you need. If you can find the right guarantor to help you secure financing, you can work to improve your credit too.
How guarantor loans work
If you want to take out a loan but don’t have great credit, check to see if the type of loan you want will take on a guarantor.
Whereas you may want to apply for personal loans or some other type of loan, remember: You may not get approved on your own. In this case, you can turn to a guarantor on the loan to help improve your odds for getting approved.
If it’s possible to add a guarantor, find the right person to help you out. Guarantors who co-sign on loans are typically family members or friends. If someone agrees to be a guarantor, you can add them as part of your loan application to help you get approved.
The loan is still your responsibility and in your name. You will need to pay it back. However, if you end up missing payments and end up defaulting, your guarantor could be called upon to repay the loan. You and the guarantor probably don’t want this to happen, so it’s important to communicate and have set boundaries about the loan before you get into this arrangement.
For starters, protect yourself and the guarantor by making sure you apply for a loan that you can pay back on your own. Evaluate the amount you are borrowing as well as the repayment terms. Finally, make sure the monthly payment amount is in line with your budget so you can stay in good standing with the loan.
Taking out this loan and making payments on time can work in your favor by illustrating a solid repayment history. In turn, this can boost your credit score.
What you should know about guarantor loans
- Having a guarantor can be a godsend if you really need to get approved for a loan but cannot qualify on your own. However, there are some important things to consider before applying for a guarantor loan.
- First, clearly discuss the loan and repayment with the guarantor. Will you be fully responsible for the repayment or will he help out? Also, if the guarantor is simply using his good credit to help you co-sign the loan and get approved — but nothing more — things can get complicated if you end up missing payments.
- Since the guarantor is legally responsible for the payments, keep in mind that if you become delinquent on the loan this can potentially ruin your relationship. So, if you have a family member act as a guarantor, make sure you both understand the ramifications and benefits.
- It’s also important to note that guarantor loans can have high APRs. Why? Because even though there is a guarantor, the loan APR is determined by the primary borrower’s credit profile. This means that your potential poor credit can lead to a high APR, resulting in higher-than-average interest charges that add to the cost of the loan.
Lastly, if you decide to work with a guarantor, choose someone with a good credit score and strong credit history as this will help you get approved for the loan.
If you have poor credit, it is still possible to get a loan. And, a guarantor can indeed help you get approved for the financing you need. Just make sure that you and your chosen guarantor talk about the arrangement and understand the risks.
If you’re both on the same page and understand how you will handle the loan, it can be a good way to get approved for a loan and build your credit.