A Guide To Guarantor Loans
If you want to borrow money from a bank or financial institution, it pays to have a plan for the cash before you even apply for the loan. This is because borrowing money is a serious matter. You must have clear ideas about how much money you need, the purpose of the loan and how you intend to repay the loan.
It also pays to know a few things about different types of loans and how they work. This article is about guarantor loans and the process of taking out this loan. However, before discussing guarantor loans, it is important to discuss why you might need this loan.
Why People borrow money
First off, borrowing money is not a hobby. People borrow money for different reasons and these reasons include the ones below:
Understanding Guarantor Loans
A guarantor loan is simply a loan where the borrower has a guarantor that covers the loan. This means that the guarantor enters an agreement with the lender to guarantee the said loan. In effect, if the borrower defaults, the guarantor can and will be held liable for the loan. Once the guarantor signs an agreement with the bank or moneylender, this agreement will remain binding until the debt has been fully repaid. The guarantor can be a friend, relation or professional colleague of the borrower.
Qualities of the Guarantor
In most parts of the UK, a guarantor must be a legal resident of the country with a verifiable means of income and financial integrity. A guarantor should also have an excellent credit score. In some cases, financial institutions will only accept a guarantor who has landed property or other solid assets.
How the Process Works
A guarantor loan is all about trust and financial integrity. You want to borrow money from a bank, but you do not have sufficient collateral. The bank insists that you provide somebody they can trust to guarantee the loan. You provide the guarantor and the bank gives you the loan.
The point here is that the guarantor must trust you or else, he or she will not guarantee the loan. On your own part, you should make the monthly or quarterly payments until the loan has been fully repaid. This way, you earn the trust of the guarantor and everybody is a happy at the end of the day.
Guarantor Loans for People with Bad Credit
If you have bad credit, a guarantor loan is just right for you. Maybe you run a small business and you want to expand this business. You need capital, but you not qualify for a loan because your credit score is bad. You can easily get a loan if you find somebody to guarantee the loan. Now, let us look at a typical scenario for guarantor loans. You maintain a current account with a commercial bank and so does your guarantor.
Now, your guarantor has £150,000 in his fixed deposit account and you want to borrow just £15,000 from the same bank. Your guarantor does not even need to pledge his shares certificates, Certificate of Occupancy or other documents to guarantee the loan. Once the guarantor pledges to guarantee the loan with the fixed deposit account, the bank will lend you the money you need.
Implications for the Guarantor
Banks and financial institutions are not in business to lose money and therefore they insist on guarantor loans for people with bad credit. Now, there are implications for the guarantor here. If the borrower defaults, the guarantor will be held liable because this is what being a guarantor means. Let us assume that you borrowed £15,000 from the bank and you are repaying the cash at the rate of just £100 a month.
If you miss one or two payments, this will not have any impact on the credit score of the guarantor. However, if you stop making the monthly payments entirely and the loan goes bad, your guarantor will be adversely affected by this unfortunate situation.
Options for the Guarantor
In case you are unable or unwilling to repay the loan, your guarantor has a number of options. The best move for your guarantor is to repay the loan and keep his or her financial integrity. This way, the guarantor’s credit rating is not affected by your inability to repay the loan. Another option is for the guarantor to get you to meet your obligations to the bank.
In this case, the guarantor will find out why you cannot meet your obligations. By working together, the borrower and the guarantor will work out a pragmatic repayment plan to avoid financial embarrassment.
If you want to buy a house, you can take out a mortgage loan to finance this project. Typically, mortgage loans involve a lot of money and the repayment period may be anywhere between 10-30 years. If you are a first time borrower, your banker or mortgage finance company will be more comfortable if a third party guarantees the loan. This reduces the lender’s risk and you can even negotiate better terms because the loan is covered by the guarantor.
Home Improvement Loans
You already have a house but the property is not in first class shape. You can take a home improvement loan to carry out renovation work on the property or remodel your house. You can even use the home improvement loan to construct a swimming pool or build extensions on the property. These things add value to the home, so your banker will lend you the money if you have a guarantor.
If you run a business, you might need one form of business loan or another to finance the business. Maybe you have a bright idea and you need capital to launch your start-up. The problem is that most banks do not finance start-ups because the risk of default is too high.
However, you can easily get guarantor loans if you can find a reputable person to guarantee the loan. If your business is on a sound footing already, you can take a loan to expand the business. You can also take a loan to invest in machinery or equipment to make your business more successful.
It does not matter if you are a business owner or a salary earner. Anybody can take an investment loan if he or she spots a great opportunity. Maybe the stock market is on a rising trend and your stockbroker recommends that you invest in blue chip stocks.
Maybe you have a healthy portfolio already but you want to diversify your holdings. You might even need cash to invest in precious metals like gold or silver. If you do not have the capital for this venture, apply for guarantor loans and you will get the cash to fund these investments.
Now, we have discussed some of the scenarios that may warrant taking out guaranteed loans. The next step is to discuss guarantor loans in detail.
Guarantor loans are excellent options for people with bad credit. This loan is also a good idea for first time borrowers and business owners that need capital. Take advantage of this option and you will enjoy the benefits.