Guarantor LoansPosted on September 5th, 2010 William No comments
A guarantor loan is one in which the person taking out a loan has someone else guarantee the loan for them; that is, that person is also responsible for the loan. Why would you want to do this?
If you're not able to get a loan on your own, due to either bad credit or no credit history, a guarantor loan allows you to get the credit you need as it will be based on someone else's credit rating. Even if you could get the loan on your own, this may allow you to receive a better interest rate as you're lowering the bank's risk. Then, because the loan is in your name, you can improve your own credit by making payments on time.
A guarantor does not have to be a person; for example, the federal government guarantees some student loans, so they promise to repay the loan if the student defaults. (Of course, this made some people very unhappy, because that arrangement allowed financial companies to make a good profit while the government took all the risk; this system has now been changed). Being a guarantor is similar to being a co-borrower, except that you become liable only if the primary borrower does not repay the loan.
While anyone with good credit and a full-time job can serve as a guarantor, it will generally be a family member or close friend, because of how risky this is; if you default on your loan, your guarantor is legally responsible for it; additionally, it can also affect his or her credit. In some cases, multiple guarantors will be used; in this case, each one is liable for the full amount of the loan. Once you have signed on as guarantor of a loan, there is no way to back out; you are responsible until the debt is paid. In other words: guarantee a loan at your own risk!