A guarantor loan can be a good choice for borrowers in certain circumstances. It is worth having a full understanding of what the loan is though and what the risks are before you decide for sure whether it is the right loan for you.

What is a guarantor loan?

A guarantor loan is designed for borrowers who have a poor credit record to be able to borrow fairly large amounts of money. They tend to lend thousands of pounds to anyone who can find a guarantor that has a good credit record. The loan works very much like a personal loan in that the borrower will be expected to repay in monthly instalments until all of the loan is repaid. The lender will decide on how much this is going to be. The main difference is that the borrower will have to nominate a guarantor who will make repayments if they cannot. This will need to be a person well-known to them, that not only has a good credit record but is prepared to help them financially. Usually a family member would be used but it can be anyone that will agree to sign up. They will need to be aware that there is a chance that they will have to make one or more repayments if the borrower cannot do so.

What are the risks of a guarantor loan?

The guarantor loan is more expensive than loans for those with a good credit record due to the fact that the lender is taking a risk. This means that it could be better to try to improve your credit record and use a different type of loan so that you can save money.

If you are not able to make a repayment, then you may feel that the risk is lower with a guarantor loan than with a standard loan. This is because your guarantor will be able to make that repayment for you and you will then be able to afford the loan rather than paying the extra charges that you will otherwise have to pay if you had a standard loan.

It is worth noting though that if you do default on a payment, the lender may decide to go to the guarantor for all future payments rather than to the borrower because they feel that is the only way they will get their money. This can put pressure on the guarantor and may end up in them having to pay far more towards the loan that they ever thought they would.  

Even if the guarantor only has to make one repayment it could potentially cause problems in the relationship between the guarantor and the borrower. The guarantor might expect there money back as soon as possible, the borrower might expect them to be happy to make that payment and not have any money back as they agreed to take on the risk. This should really be sorted out before the loan agreement is signed so that both the borrower and guarantor know what the expectations of the other are. If this is written down and both have a copy it will serve as a reminder and should prevent any disagreements that might happen as a result of misunderstandings about expectations.

There may even be problems with other friends or family members if they want to use your guarantor and they refuse as a result of how things worked out with you or if they want money from your guarantor but they need to keep their money in case they need to make a payment for you. It can cause problems in the relationship then between the borrower and the guarantor as well as between the guarantor and others and maybe those others and the borrower. It can get pretty complex.

Is a guarantor loan right for me?
The first thing you need to think about is whether you know someone that will be a guarantor for you. Think about whether they are in a financial situation where they will be able to help you as well as whether they are likely to be prepared to. Also consider your relationship with them and their relationship with others, how they normally are with finances and whether they lend money out or help others financially as well. Consider how this might impact your relationship with them and others.

You also need to think about the cost of the loan and whether you are prepared to pay that much. Loans differ in price and as this is a loan for those with a poor credit rating it can be expensive compared to other loan types. Even if it is your only way to borrow, you need to consider if you are prepared to pay that much to pay for whatever it is you are funding with the loan.