Applying for a guarantor loan can be quite a serious decision. The amount of money you can borrow up to £15,000 can be a life-changing amount, whether you use towards renovating a new home, buying a car or planning your wedding. It is an amount that can really make a difference to your every day.
Above all, the costs of a guarantor can be quite high if not managed correctly. If you do not keep up with repayments, you can potentially incur default charges and extra interest on top of what you are paying. Below, we give you a useful checklist to consider before applying:
- Do you need the loan? Are there alternatives?
- Do you meet the criteria?
- Do you have a guarantor?
- How much should I borrow?
- How long do you need the loan for?
- How does an application impact my credit score?
- How you are going to repay
1.Do you need it?
Guarantor loans are ideal for those with adverse credit histories and perhaps cannot access finance from mainstream lenders or banks (personal loans and unsecured loans). The borrower therefore needs some form of extra security which requires getting a guarantor.
The implications are that the cost of subprime loans tends to be a bit higher – guarantor loans start at 39.9% and the lender feels they need to charge these amounts to mitigate the risk of default. The question you need to ask is whether you need to borrow a few hundred or thousand pounds with a guarantor or use a cheaper alternative.
Although they may not be as fast as the 48 hours offered by our lenders, you can borrow similar amounts from a credit union at 26% APR, although it may take a week to be transferred. There is also credit cards for bad credit at around 24.7% or you could consider borrowing directly from family and friends and they may in fact charge you much less interest or no interest at all, without any late fees.
2. Do you meet the criteria?
Whilst every lender has a different criteria for their guarantor products, they generally focus around the following:
- Applicant is over 18 years old
- Guarantor is over 25 years old (to reflect the responsibility involved)
- UK Resident
- Employed and able to make repayments (earning at least £500 pm)
- Working debit card
- Working mobile phone and email address
- Have a guarantor (homeowner status may be required)
Like most loans, your ability to repay should be based on your income from work and using your guarantor should be a last resort. To confirm your employment status, you may be required to provide proof of a pay-slip or bank statement. For those individuals who are on benefits, unemployed or have a history of CCJs or bankruptcy, they are unlikely to be eligible.
Similarly, you must have a debit account so funds can be paid into it and collections can be retrieved. Credit cards are not used during the collection process because it is just another way to revolve credit and can lead to a spiral of debt. You must have a valid email address and mobile phone account so that you can verify your loan agreement and be contacted anytime moving forward. Finally, you must have a guarantor involved in the legal agreement, something that we discuss in further detail below.
3. Do you have a guarantor?
Something that will really speed up your application is finding the best person to be your guarantor and having them ready to complete the loan documentation. This is a not a heavy loan agreement that requires a lawyer to look it over, but rather a 2 to 3 page document which can be accessed online and signed electronically.
The quality of your guarantor will be crucial to getting your loan approved and it may cases, it is the deal breaker. You ideally want someone who you trust and is close to you, whether it is a family member, spouse, sibling or best friend. The reality is that a guarantor loan can last up to 7 years, so you want someone who you will still be in touch with, in case they need to be involved. Will you still be in touch with a colleague from work in 7 years? Unlikely. Your sibling, most definitely.
Above all, you need to find someone that not only is above 25 and has a good credit history but who has a homeowner status. Whilst not all homeowners have great credit, it is more likely that they do since they have passed the trials and tribulations of mortgage approval. Plus, in the rare event that they need to repay the loan, they can easily be contacted at their residence and be able to raise funds by remortgaging or selling their home, as a last resort.
The stronger your guarantor, the lower rate you will likely pay around 39.9% APR. By comparison, although many of our lenders offer tenant guarantor loans, the rate charged can be considerably higher at around 59.9% and you will only be able to borrow less.
4. How much should I borrow?
The natural human response is to try borrow the maximum amount possible that is available. For this reason, one of our lenders, TFS Loans, is very popular because they offer a maximum of £15,000. However, one must be aware that you accrue more interest for the more you borrow, so in theory, you are better to calculate the exact amount that you really need for your expense and apply to borrow that specific amount.
Furthermore, the highest amounts available from our lenders may only be applicable for those with long-term employment, strong guarantors with a homeowner status and repeat customers. Plus, the amount you can borrow will be based heavily on your affordability and income so if you only take home £500 per month, the lender will discourage lending you the highest amount because this could put pressure on your financial position.
5. How long do you need the loan for?
The guarantor loans we feature are available for 12 months to 84 months (1 to 7 years), depending on the lender. Again, there is the temptation to borrow the loan for longest time possible and try delay the full repayment for as long as possible. However, the longer the loan is open for, the more interest that will accrue over time because essentially you are paying for the convenience of having a longer time to repay.
Example: a £4,000 loan with Amigo borrowed over 12 months, will equal a full repayment of approx. £4,900. For the same loan amount for a period of 24 months, will require a full repayment of approx. £5,900.
Therefore, something to consider when you apply is how long you will really need the loan open for. You need to review your income and expenses prior to applying and determine when you will be in a financial position to repay. Does this mean you will have more money saved up? Will you get a bonus from work at the end of the year? You should be able to select the exact month when you will be able to repay in full.
To avoid falling into arrears, you can always select to have the loan open for an extra month or two because every lender we work with allows you to clear your loan account early. You only repay for the amount of time that you have had the loan open for and therefore paying back early may entitle you to a large rebate of interest.
6. How does an application affect my credit score?
Every time you make an application for a consumer credit product whether it be for a loan, mortgage or credit card – your credit file will be checked by the lender who will access the information by one of the three main credit reference agencies in the UK: Call Credit, Equifax and Experian.
Every time your file is checked by a lender, it leaves a search footprint to state that a lender has checked your account. It lasts for just 12 months and in this time other lenders can see the information and who has been checked. Whilst having a one-off check does not negatively impact your credit score, it can have adverse effects if you have many search footprints within a short space of time. This is because it makes you look financially stretched and desperate for finance.
Therefore, our recommendation is that you apply for a lender one-by-one and wait to hear back, rather than applying for several lenders at one.
Another point to be aware of is that if you fall behind on your monthly repayments for your loan, the information from the lender will be shared to the credit reference agencies and this could make your credit score fall down. By contrast, if you repay your loan on time every month, this could make your credit score go up and improve over time. In fact, this is one of the reasons that people like to be a guarantor, to allow their friend or family member the change to better their credit rating.
7. How you are going to repay
An essential point to your loan application is having a think about how you are going to repay your loan. As mentioned, you only want to use your guarantor as a last resort and ideally once the loan is funded, you do not want to involve them again. You need to consider how you are going to repay each month – through your income? A bonus from work? Inheritance? Selling your home?
It is important to sit down and carefully work on your expenses and be able to put the amount owed aside each month i.e £200, £300 etc
Falling behind on repayments can be very detrimental to your financial profile. Not only can you incur additional charges such as extra daily interest and one-off default fees, the biggest impact is against your credit file. Having a poor credit score makes it harder to access finance in the future such as credit cards and mortgages and means that if you are able to access finance, it will usually be a much higher rate than other mainstream finance.