What Are Guarantor Loans and How Can They Help

Saturday, July 21, 2012

What Are Guarantor Loans and How Can They Help

Guarantor loans represent a type of unsecured personal loan, where the risk is passed on from the loanee to a third party guarantor. A guarantor basically means a person who agrees to act as the security for the loan. They don’t pay the loan themselves, but can step in and pay the remainder of a loan if the main loanee defaults. A lending bank takes the guarantor’s value as a homeowner, and a strong credit history, as indicators that they will be able to support the loanee.

A guarantor loan is consequently different from a typical secured or unsecured loan. In terms of the former, a secured loan is made against a property, whereby the terms of the loan stipulate that the lender can take control of an asset if the loanee defaults. This approach is usually taken for house mortgages and other high value investments, and involves a long term commitment by the loanee to monthly payments. The interest rate, or APR, on these payments is often low given the security provided by a house or other forms of property.

Guarantor loans are closer to unsecured loans by not obliging the main loanee to secure their loan against property. However, by using a third party guarantor, a loanee who would not otherwise be able to gain an unsecured loan due to a poor credit history is able to trade off another’s strong credit rating. Most guarantor loans are made on figures from £500 to £5000, and feature generally low monthly premiums, while some lenders offer fixed APRs.

How They Help

Guarantor loans are valuable because they give a loanee who does not own property, and has a bad credit history, to both take out a personal loan, and improve his credit rating. A suitable guarantor must be a homeowner aged between 25 and 75, and not the spouse of the loanee. This approach is also worthwhile if a loanee is young and does not have sufficient credit rating to be eligible for a major unsecured loan. Moreover, they can be set up at short notice if the guarantor passes credit rating inspection.  

Things to Watch Out

It is vital that a loanee picks the right guarantor, no matter what the size of the loan is. The guarantor must understand the terms and conditions of the loan, and must accept that they will be liable to pay off the principal of the loan, as well as any interest accrued over time. Significant time should be spent discussing a guarantor loan beforehand. The guarantor is effectively doing the loanee a major favour, and should trust that they are able to pay back the loan without putting them into a difficult situation.

In this way, a loanee should never rush into a loan without careful consideration and questioning of the lender in question. Reputable lending agencies will have to be compliant with the Office of Fair Trading in the UK, and should also demonstrate a commitment to treat customers fairly. A good lending agency will provide a detailed breakdown of costs and forms of indemnity for both the loanee and the third party on their website, and should always ensure that a loan is not given out to an unsuitable party.

About the Author

Christina Appleworth reviews the concept of guarantor loans and how they can potentially help the loanee.

No comments:

Related Posts Plugin for WordPress, Blogger...