What is a Guarantor Loan and is it Right for Me?

Apr 17

What is a Guarantor Loan and is it Right for Me?

Being in any kind of financial difficulty isn’t nice, whether you owe a friend a tenner or the bank £10,000. The mounting debt can easily get on top of people and there are no signs of how you can get away from it with the interest adding more and more to the bill on an almost daily basis in some cases. It’s easy to see why debt has such a crippling effect on some people.

Going to the bank and asking for a loan to clear your debts is the obvious solution, but not everyone is eligible for a loan. Ironically, part of the reasoning behind getting turned down is due to a poor credit history based on missed repayments – the whole reason for asking for a loan in the first place. When this happens people are left with little option but to start selling off their most expensive possessions, the kind of things they’ve worked so hard to afford – their cars, televisions, furniture and so on.

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If this situation sounds familiar, it’s important to remember that you’re not the only person who has ever experienced this kind of problem. Thousands of people around the UK alone go through this kind of financial crisis each year and they often feel that they have nowhere to turn.

Fortunately, a different type of loan has been created and made available in the past few years which makes it possible to borrow “small” amounts of cash over shorter periods of time at much lower rates than other loans out there. A guarantor loan, as it is known, is usually for people looking to borrow between £1,000 and £10,000 over the course of around five years; and works by including a second person on the loan agreement.

This additional person, the guarantor, signs their name on the agreement stating that should the borrower be unable to make the repayments for whatever reason (like they’ve lost their job and can’t afford it for example), then they will pick up the debts to help them to make the repayments on time. This works out well for the lender because they get their money back on time, and for the borrower because it means that they don’t have to sell off their prized assets in order to pay the loan back.

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Before you start to think “brilliant, a guarantor loan is the answer to my prayers”, it’s worth taking something into account. Yes, the guarantor loan option is a good one, especially when you compare the APR against other loans, but you’re asking someone who is either a close friend or family member to agree to pay your debts if you can’t do it. That’s a huge commitment and a massive favour to ask them, and something you can’t rest on. If you go into the agreement thinking “it’s okay, my mate will pay it” then you risk losing your friendship. They are on the agreement in the case of emergency and not as an option.