What Are Guarantor Loans?
"Can a person with a bad credit score get a loan?" This is a question would-be borrowers often ask – especially when their credit scores are not very good. The answer to this question is "Yes". A person with a bad credit can get a loan. All they need to do is apply for a guarantor loan.
A guarantor loan is a type of unsecured loan (i.e. a loan for which there is no collateral or security required). This loan can be given to anyone irrespective of their credit score. There's only one condition. The loan applicant has to come with another person to guarantee the loan. This person is called the guarantor of the loan (hence the name "guarantor loan").
In guarantor loans, two people sign the credit agreement (or loan application) i.e. the borrower and the guarantor. The guarantor co-signs the agreement and undertakes to pay back the loan in case the borrower fails to repay it.
The rationale behind guarantors is simple. Lenders usually want an assurance that they will get their money back. For secured loans, this is easy since collateral is usually provided. If the borrower fails to pay back the loan, the lender simply takes the collateral. For unsecured loans, it is more complicated. The only confidence a lender can have is from a borrower's credit score.
Unfortunately, some people have bad credit scores and others have no credit scores at all (e.g. a fresh graduate who is applying for their first loan). For such people, lenders have no frame of reference to determine their likelihood to pay back. This is where guarantors come in handy.
A guarantor is usually required to have three characteristics. First of all, their credit score has to be extremely good. A person with a bad credit score cannot be accepted as a guarantor. This is because bad credit normally results from failing to repay previous debts promptly.
Secondly, the guarantor should know the borrower well enough to co-sign for their loan. They should trust that the borrower will pay back the money promptly. This is because inconsistent payments or defaults by the borrower will mess up the guarantor's credit score.
Finally, the guarantor should be ready to repay the loan in case the borrower fails to do so. This is important for the lender. It almost guarantees that their money will be repaid. In fact, in some cases, even if the borrower declares bankruptcy, guarantors are still legally required to pay back the borrower's unpaid guarantor loans.
Legally speaking, guarantors are as liable for guarantor loans as the borrowers. In the event that a borrower defaults on the loan – the lender can go after the guarantor. In fact, most lenders leap on the guarantor at the first sign of trouble. This is because they usually judge the guarantors as more reliable, responsible and eager to protect their credit scores.
For borrowers with a checkered credit history, guarantor loans can be the ultimate redemption. These loans can provide a great opportunity to begin improving their credit score. All they have to do is make sure that they make their payments promptly and on schedule. Sometimes, the presence of another person (i.e. the guarantor) can provide a further impetus to make prompt repayments.
So, where do guarantors come from? Well, in most cases, guarantors come from the borrower's close circles i.e. parents, siblings, friends and co-workers. Basically, anyone who knows and trusts the borrower well enough to risk their own financial life on their behalf. Becoming a guarantor is a financial risk on two fronts (1) the borrower's inconsistent repayments can affect the guarantor's credit score, and (2) if the borrower fails to repay, the debt will be collected from the guarantor.
The possibility of debt collection from the guarantor means that most lenders have one extra requirement from them. A guarantor needs to have enough money to repay the debt. They need to demonstrate this before the lender can accept them as a guarantor. If a person's financial situation doesn't convince the lender of their ability to pay, the lender will in most cases refuse to have them as a guarantor.
In a nutshell, guarantor loans are unsecured loans which require two people to co-sign the credit papers. These two people are the borrower and the guarantor. The guarantor undertakes to repay the loan in case the borrower fails to do so. This arrangement means that both people with bad credit scores and those without credit scores can be in a position to acquire loans.