A guarantor loan
is a type of unsecured loan
that requires a guarantor to co-sign the credit agreement. A guarantor is a person who agrees to repay
the borrower’s debt should he or she default on agreed repayments. The guarantor is often a family member or trusted friend who has a better credit history than the person taking out the loan and the arrangement is, therefore, viewed as less risky by the lender. A guarantor loan can, consequently, enable someone to borrow
either more money, or the same amount at a lower rate of interest, than they would otherwise be able to secure through a more traditional type of loan.
Guarantors are often parents who want to help out their young adult children
– it could be help raising the deposit for their first home, or it could be to buy a new car or complete a training course that will help them on the next step of their career
. There are many reasons why young people may need such help and the fact they cannot obtain a loan themselves does not mean that they are not financially responsible or able to pay back the loan.
Guarantor loans are sometimes seen as alternatives to payday loans and associated with the sub-prime finance industry, due to them being aimed at people with a less than perfect
credit score, because of missed payments towards debt in the past. However, this is only one aspect of guarantor loans. They are also aimed at young people who have no
credit score, due to having never obtained credit in the past such as new graduates just embarking on their career - these people are often high earners with sensible financial habits so can afford the repayments but do not have the credit history to reassure the lender about the level of risk. As mainstream
lending criteria is often automated and does not come with a personal review of the applicant
's financial circumstances it is sometimes the only way a young adult
in their first job can secure a loan.
Although guarantors are a relatively new introduction to the unsecured loan market, it's not uncommon for people to be asked
to provide a guarantor to co-sign other forms of financial agreement, such as in residential
letting contracts, where young people without previous references are often required to provide a guarantor and in the mortgage industry, where guarantors are often used to help people obtain a mortgage when they would otherwise be declined
due to being considered a credit risk
These loans are sometimes used by angel
investors to help out startup
companies where the investor is unwilling or unable to provide direct funding.
Although these loans can be used to help provide financially responsible individuals with lending they could not otherwise access, it is important to recognize
that they still do carry significant risks for the guarantor, who is liable for the full debt amount should the borrower be unable to make repayment. A report suggests that these loans could be as damaging as payday loans, with 43% of guarantors in the study unclear about their financial liability.