A guarantor loan can be a good choice for borrowers in certain circumstances. It is worth having a full understanding of what the loan is though and what the risks are before you decide for sure whether it is the right loan for you.

What is a guarantor loan?

A guarantor loan is designed for borrowers who have a poor credit record to be able to borrow fairly large amounts of money. They tend to lend thousands of pounds to anyone who can find a guarantor that has a good credit record. The loan works very much like a personal loan in that the borrower will be expected to repay in monthly instalments until all of the loan is repaid. The lender will decide on how much this is going to be. The main difference is that the borrower will have to nominate a guarantor who will make repayments if they cannot. This will need to be a person well-known to them, that not only has a good credit record but is prepared to help them financially. Usually a family member would be used but it can be anyone that will agree to sign up. They will need to be aware that there is a chance that they will have to make one or more repayments if the borrower cannot do so.

What are the risks of a guarantor loan?

The guarantor loan is more expensive than loans for those with a good credit record due to the fact that the lender is taking a risk. This means that it could be better to try to improve your credit record and use a different type of loan so that you can save money.

If you are not able to make a repayment, then you may feel that the risk is lower with a guarantor loan than with a standard loan. This is because your guarantor will be able to make that repayment for you and you will then be able to afford the loan rather than paying the extra charges that you will otherwise have to pay if you had a standard loan.

It is worth noting though that if you do default on a payment, the lender may decide to go to the guarantor for all future payments rather than to the borrower because they feel that is the only way they will get their money. This can put pressure on the guarantor and may end up in them having to pay far more towards the loan that they ever thought they would.  

Even if the guarantor only has to make one repayment it could potentially cause problems in the relationship between the guarantor and the borrower. The guarantor might expect there money back as soon as possible, the borrower might expect them to be happy to make that payment and not have any money back as they agreed to take on the risk. This should really be sorted out before the loan agreement is signed so that both the borrower and guarantor know what the expectations of the other are. If this is written down and both have a copy it will serve as a reminder and should prevent any disagreements that might happen as a result of misunderstandings about expectations.

There may even be problems with other friends or family members if they want to use your guarantor and they refuse as a result of how things worked out with you or if they want money from your guarantor but they need to keep their money in case they need to make a payment for you. It can cause problems in the relationship then between the borrower and the guarantor as well as between the guarantor and others and maybe those others and the borrower. It can get pretty complex.

Is a guarantor loan right for me?
The first thing you need to think about is whether you know someone that will be a guarantor for you. Think about whether they are in a financial situation where they will be able to help you as well as whether they are likely to be prepared to. Also consider your relationship with them and their relationship with others, how they normally are with finances and whether they lend money out or help others financially as well. Consider how this might impact your relationship with them and others.

You also need to think about the cost of the loan and whether you are prepared to pay that much. Loans differ in price and as this is a loan for those with a poor credit rating it can be expensive compared to other loan types. Even if it is your only way to borrow, you need to consider if you are prepared to pay that much to pay for whatever it is you are funding with the loan.

When you are looking for a loan, it can be hard to know which to go for. There are so many different loans available it can seem really confusing. Unless you use an independent financial advisor to help you, it will be up to you to make the right choice. If you break the job down into steps you should find that it is a lot easier.

Which type of loan is best

You need to choose the right type of loan to suit the purpose of your borrowing. Some loans will be designed specifically for a particular purpose such as a student loan or car loan and so this will be easy if you are buying something like that. However, many loans do not have a specific purpose in mind so you will have to choose between them. Loans vary in how much they will lend with payday loans, credit cards, credit unions and overdrafts lending smaller amounts compared to personal loans and homeowner loans which will lend you more money. This means that depending on how much you want to borrow you will be able to whittle down your choices.

Repayments differ as well as some loans make you repay a certain amount each month, some you repay when you can and others you only repay a small amount with the option of repaying more. You need to think about whether you can manage to repay in a lump sum and therefore could use a payday loan, whether you would rather repay in instalments and get a personal loan or if you would like more flexibility to repay when you can and get an overdraft. However, the cost of these loans will vary a lot with the more flexible ones generally being more expensive with the exception of the payday loan which tends to be the dearest as it is suitable for those with a poor credit record and therefore the lenders take on a lot of risk and charge extra for that.

Which lender is best

Once you have picked a loan type then you will need to choose between lenders. You will need to think about the reputation of the lender and what their customer service is like and how flexible they are. Think about what features you would like in the perfect lender and try to find one that will match up to that. To find out more about them, look at their websites, ask family and friends if they have used them and whether they would recommend them and look at online reviews. It is also important to compare the costs of the different lenders as these will vary. Make sure that you take into account any fees and charges as well as the interest rate. If you compare the APR rather than just the interest rate, this takes these into account and so should be an easy way to compare. The cheapest lender may not be the best as it may not have all the features that you desire, but if you can find one that is within the cheaper ones, then should be able to get good value for money, so get a good service without paying more than necessary.

So, you will need to do quite a bit of research if you want to find the best loan for you. If you find the job too daunting then there are websites that will help you. They will explain more about different loan types and how they work. Some have price comparisons on there to make it easier for you see which lenders are cheaper than others. These comparison sites are also useful because you will become aware of which lenders are out there, as it is not always easy to know with so many of them being available. However, most comparison websites will not list all lenders. They may even just list the ones that give them the highest commission. This means that it is wise to take a look at a selection of different comparison sites and also do some research yourself. There are some lenders that do not even appear on comparison websites as they only deal directly with customers and they might be cheaper as well because they do not pay out commission.

It is worth doing this research though as it could make your lending experience much better. Not only will it enable you to find a cheaper loan, but you should be able to find good value for money if you look at the other features as well. Hopefully you will end up getting a loan that you are happy with and can repay easily. It may not even take that long to do the research and once you have completed it you will be able to use your knowledge next time you need a loan, although the rates will have changed so you will have to check the prices again.