Are Guarantor Loans for Someone Specific?
It is worth knowing that a guarantor loan was designed to help those that have a poor credit record to be able to borrow larger sums of money. Normally loans are not available to those with a poor credit record as traditional lenders do not want to take on someone that they do not trust. However, some lenders realised that these people needed some help and created payday loans which they could use to borrow small amounts of money in emergencies. But these only provided borrowers with up to £1,000 which was often not enough for what they needed to buy. Therefore, guarantor loans came along where more money could be borrowed but the borrower needed someone to make the repayments for them if they could not do it. This enabled the money to be lent without the worry of trust between borrower or lender.
How do They Work?
So the borrower will need to nominate a guarantor. They will need to have a good credit record and be prepared to cover the cost of any loan repayments that the borrower misses. This is up to the borrower to explain and organise. Therefore, they will need to find someone that will be happy to do this for them. Often it could be that they nominate a parent or grandparent but it can be anyone that they know that will agree to do it. Once the loan is set up it will still be the borrower’s responsibility to have the loan payments go by direct debit form their account. However, if when the lender tries to take the money there is not there or not enough, they will go the guarantor to make up the missing balance. The specifics of how it works will change depending on the specific lender and their precise conditions.
Apart from this the loan works very much like a normal loan. The borrower will be given a lump sum of money to spend on whatever they wish and they will then be expected to make monthly repayments until the loan is repaid. How many payments it takes will depend on the amount that they borrow and how much the repayments are. A missed repayment will incur a charge, just like a normal loan, but with this loan the repayment will then be taken from the guarantor.
If this happens then the guarantor may expect the borrower to repay them. However, it will be up to the borrower and the guarantor to come up with a plan. The lender will not get involved in this. It might be that the guarantor will be willing to make a few payments and not have the money back, but it is important for them to discuss this with the borrower. If the guarantor does want their money back, they will need to make it clear that they will want this to happen and what they expect with regards to the timing of this. Will they expect I as soon as possible or will they be happy to wait until after the loan is repaid, when the borrower will have more money? It is important for this to be talked about first.