If you have no credit history or a poor credit rating, guarantor loans are a great way to secure the finance you need, and build your credit score at the same time.
How does it work?
Guarantor loans are a type of 'unsecured' loan which has a third party involved in the form of 'guarantor'; who is willing to take on the commitment of the repayments, should you no longer be in a position to do so.
Who can be my guarantor?
It's intended that your guarantor will only be needed as a last resort.
If your current financial standing is good, but for whatever reason you can't get the credit you need, it's entirely possible that a trusted friend or relative may be willing to help you out. The credibility of their credit record will allow providers to reassess the risk, with the likelihood that it will decrease the risk of your application and you can also expect to enjoy a lower interest rate as a result.
Depending on the value of the loan, the guarantor may need to be a homeowner, or at least be able to prove that they have the necessary finances to cover the cost of the loan, if the need were to arise. Your guarantor will also need to be 21 or over and cannot be currently linked to your finances – for example your spouse.
As they will also have to pass the credit check to prove their standing, they will also need to provide identification and details of their current finances.
Using a Guarantor Loan to Rebuild Your Credit Score
Meeting all of the scheduled payments on a guarantor loan will do wonders for your credit score, and will help you in the long term, with it being more likely that you'll be accepted for regular unsecured loans, credit/store cards, and anything else requiring a credit check.
If your needs are only short term, you consider using a credit-builder credit card, which has a high rate of interest, but may work out cheaper if your financial needs are no longer than a month or two.
Things to watch out for
Naturally you'll need to have a good trusting relationship with your guarantor before you'll be able to proceed. They are the ones taking all of the risk on your behalf, with no real reward. It's your duty to make sure that they are aware of all of the financial details and any risks you may foresee, such as redundancy, or anything else which may impact upon your ability to make the payments. Be careful not to overstretch your finances – typical providers will be willing to offer from £1000 - £7500 for a guarantor loan, so be wary about borrowing more than you actually need, and overburdening yourself with repayments that aren't necessary.Image: © Monkey Business Images | Dreamstime.com