There is something amiss when a declined bank applicant goes straight to a high street lender. Many of these customers with shaky credit could still borrow money at a somewhat reasonable rate, but only if they have someone to vouch for them. The rise of guarantor loans fills this niche of borrowers who are capable of repaying the amount but are haunted by previous credit challenges.
A guarantor loan is essentially a source of financing that carries no collateral. It is essentially a personal loan, and the lack of security that is required for this source of funds is partially offset by the promise to repay by a creditworthy associate of the borrower. What does all this mean?
Someone who lacks the credit rating necessary to obtain the funds could still borrow the money if another capable person agrees to sign as a guarantor. They promise to repay any amount that the primary applicant is unable or unwilling to.
Rates vary by provider. Most guarantor loans carry a representative interest rate of about 49% APR. Some charge an upfront fee, making the annual rate slightly less.
On a £5,000 initial balance repayable over the course of 60 instalments (5 years), a borrower would typically hand over nearly £12,000. Approved amounts vary, though the normal range is £1,000 to £7,000. Some lenders go higher, while others only go up to £5,000.
These personal loans work just like any other. Approved applicants may repay the proceeds over equal instalments. If they fail to pay and the account goes into default, then the firm will pursue repayment of the debt directly or through a collections agency. There is an additional amount of protection for the lender though, since most of these borrowers lack the level of credit necessary to gain approval for so much money.
The guarantor (person who agreed to vouch for the borrower) is on the line for repayment of the failed loan. It is their responsibility to make good on the promise to repay. This is their liability, and it does not matter if the primary applicant is unemployed, sick or just flat out refused to repay the loan. They guarantor must repay the amount or they face damaged credit plus potential collections and legal action.
There are several providers that offer products to those with a guarantor.
Some lenders will allow a guarantor to be a tenant. Others require that a homeowner make the pledge. The purpose is to ensure financial stability of the responsible guarantor who may ultimately be called upon should the account go into arrears.
The common providers use a combination of telephone requests and Internet applications to initiate the process. A signed document is necessary to activate the account and make the funds available.
UK Bill Help is not a loan broker and therefore does not favour one product over another. As an information service, our role is to enhance transparency in the sector by revealing common customs and charges.
A person considering a guarantor loan may first wish to consider whether they would be approved for a lower cost unsecured personal loan through a bank or credit union. Those products could save hundreds of pounds in finance charges over the course of one to five years.
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