In order to decide for sure that a guarantor loan is right for you or not right for you, you need to really understand what they are and how they should be viewed. To help you do exactly that, we’re about to discuss 7 misunderstandings about guarantor loans that you should most definitely be aware of. Each of these incorrect beliefs can cloud your view of guarantor loans and sway your decision making in unhelpful ways. Find out more about them below.
1. Repayments Are Made by the Guarantor
This is a common misunderstanding because a lot of people aren’t fully aware of what a guarantor actually is. A guarantor is not someone who becomes responsible for repaying your loan when those repayments are due. They only have to repay the loan on your behalf if it becomes clear that you’re not able to do so; that’s when the responsibility shifts from you to them. Until then, the borrower is responsible for making repayments.
It’s important that the person taking out the guarantor loan believes they’ll be able to make those repayments. No one wants to actually find themselves in a situation where the guarantor has to start making repayments for them because that means the borrower has failed. There’s always a risk that the relationship between the borrower and the guarantor can be permanently soured if this actually happens too.
2. The Guarantor’s Credit Score Will Certainly Suffer
Guarantors don’t have to worry about how this kind of loan will impact them because it doesn’t show on their credit report before any loan default. It’s entirely the responsibility of the borrower until a time arrives when the borrower can’t pay the money back to the creditor and the guarantor has to step in and make those repayments for the borrower. Therefore, it’s not necessarily true that the guarantor's credit score has to suffer in any way.
Loan default in this situation arises when the borrower can’t make repayments and after the creditor sends out at least three legal notices regarding missed repayments. If repayments are continually missed, that’s when the loan will show up on the guarantor’s credit report. But it won’t damage it as long as they make the repayments missed by the borrower. It’s only the borrower's credit score that will suffer if that happens.
3. The Guarantor Secures the Loan with Collateral or Their Credit Report
It’s commonly believed that guarantor loans are secured loans that make use of collateral, but that’s simply not true. The guarantor themselves act as the backup. They’re the person that the creditor will rightly expect to pay the debt if the original borrower is not able to. It’s not the case that the guarantor loan is secured against the home or property of the guarantor and it isn’t reliant upon their credit report either.
It’s usually the case that the creditor will perform a hard credit check on the borrower and a soft check on the guarantor. At no point are the possessions of the guarantor used as collateral before the loan is granted. Instead, the guarantor signs a loan contract with the borrower and this is then used by the lender as a guarantee or form of security. It gives them a means through which to retrieve the money owed to them if the borrower can’t make the repayments.
4. Interest Rates Are Always Unreasonably High
Lots of people think that guarantor loans always have unusually high-interest rates attached to them but that’s not necessarily true. Interest rates vary, so just like with other loans, there are some options that come with high-interest rates but there are also better guarantor loan options out there with more reasonable interest rates attached to them. This underlines the importance of comparing the options and doing research before choosing which guarantor loan is actually right for you.
Guarantor loan products typically have interest rates in the region of 29% - 69%. This is normally lower when compared to payday loans or short term loans for example but it makes sense to compare your options as every lender will have different ways of assessing the viability of a borrower and a guarantor, and these conclusions will impact the interest rate available to you.
5. Only Small Loans Are Available
Some people incorrectly believe that if you choose a guarantor loan, they’ll only be able to borrow very small amounts of money but, again, that’s simply not true. Small loans are available, but it’s also true that larger loans are available too. The truth is that guarantor loans are actually a lot more flexible in terms of both the interest rate and how much you can borrow than many people realise.
It really comes down to the individual applying for the loan. You will be assessed on an individual basis, and that's something that’s best for you and best for the creditor. That way, you can be given a loan that suits you and your needs, while also ensuring that it’s affordable for you when it comes to making repayments and worthwhile for the lender because they want to make their money back plus interest.
6. Guarantors Have to be Family Members
It doesn’t matter who becomes your guarantor in the end. Of course, there’s nothing at all wrong with having a family member as a guarantor. They’re able to become a guarantor for you if that’s what they want to do, but you aren’t limited to your immediate family members. Some people avoid applying for guarantor loans because they’re not sure whether they’ll be accepted without a family member as a guarantor.
It’s not something that applicants need to worry about though. It doesn’t matter who the guarantor is as long as they’re willing to sign an agreement that outlines the details of the loan and what will happen if the borrower isn’t able to make the repayments. As long as they do that, it doesn’t matter whether they’re your parent or a complete stranger to you, even if it is more common for your guarantor to be someone close to you.
7. The Newness of Guarantor Loans Makes Them Daunting and Risky
One thing that can really put off some people from applying for guarantor loans is the fact that these loans don’t seem to have been around for very long. Some view them as a flash in a pan or something insecure that might not be around in the near future. That level of uncertainty can really put people off and make them not want to get involved with guarantor loans at all.
It’s certainly true that guarantor loans have risen in popularity in recent years, but they’ve actually been around for longer than people think. They were around in the 1980s and hit their high point in terms of popularity in the 1990s. After that, they faded a little but as lenders became more cautious about lending to people, they became a viable loan option once more. So, in short, guarantor loans represent an established form of lending, even if they seem new to many.
Borrowing is something that should always be done with care and after lengthy consideration. Rushing into a guarantor loan or any kind of loan is never advisable, and your first step should always be to consider whether you really need to borrow; there might be alternative options out there for you to consider.
Andrew joined Choose Wisely 5 years ago, originally working in a design capacity to make sure the website was simple to use. Most notably he worked with the Consumer Finance Association to design the comparison table of choice for High-Cost Short Term Finance products.