Guarantor loans

Getting someone to vouch for you is a well known way of increasing the trust others put in you, especially if the person vouching for you is themselves trusted.

This is the idea behind guarantor loans; if you have difficulty getting a loan because of poor credit, you can get someone who has good credit, and therefore more trustworthy, to vouch for you, thereby increasing the lender's confidence in you.

It is a similar model to guarantor mortgages where first-time home buyers get help from their parents who at that stage have paid off a greater portion or their entire mortgage.

How they work
1 - The borrower finds someone who knows them and is confident they will manage to pay back the loan, and therefore is willing to use his/her own credit to help the borrower get the loan. The guarantor can be a family member or friend as long as they meet the lender's criterion which typically consists of; being a home owner, over the age of 23 and with a good credit rating.

2 - The borrower provides details to the lender, application forms will be sent for both borrower and guarantor to complete, once returned the lender might also need to contact the nominated guarantor to confirm their details and whether they consented to the arrangement.

3 - The lender will check the guarantor's credit rating as well as other requirements, if they meet the requirements, the loan will be issued to the borrower, the guarantor needn't play any further part unless the borrower has trouble paying off the loan, at which point the guarantor would be called upon to cover the payments.

Advantages
Makes it easier to get credit:
In a situation where an applicant is having difficulty getting a loan on their own, a guarantor loan presents their best chance as having someone to guarantee repayments reassures the lender.

Use your friend's good credit:
Instead of checking your credit history, the lender will check the credit rating of the guarantor.
Lenders know that credit ratings aren't perfect, they also realise that they can never know you as well as the people you interact with. Therefore, the concept of a guarantor loan is that your guarantor is the one that evaluates you, and if they're confident enough that you can manage to repay the loan, they let you use their credit rating.

Lower interest rate:
Because the guarantor has to be someone with a good credit rating and a home owner, the interest rate should be lower than that on a loan for someone with bad credit.

Disadvantages
Risk of being asked to pay someone else's debt:
As a guarantor you put yourself up as insurance for the loan; if the borrower fail to pay, the lender will expect you to cover the payments.
Before agreeing to such an arrangement, you should think carefully about the risk it poses to you. It's best to carefully evaluate the person asking you to act on their behalf, focusing on their income and past behaviour with money.

If you doubt that the person will manage the loan, it is better to politely say no than risk your own financial wellbeing.


Related:
Loans for people with bad credit - Payday cash loans
Small cash loans - Credit cards for people with bad credit
Prepaid credit cards