Guarantor loans explained

When seeking funding for your business, there are several options available to you. One of those is a guarantor loan. As with any financial product, there are pros and cons for you to weigh up, so it’s vital that you do your research to make sure loaning with a guarantor is going to be right for you and your company.

To do that, you need to know a number of things. For example, what is a guarantor on a loan? How does a guarantor loan work? And do you need a guarantor for a loan? We’ll answer all of those questions and more right here in our handy explainer.

Guarantor loans: What are they?

A guarantor loan is a type of loan where someone else guarantees to make the repayments if you are unable to do so. They can be a viable option for those who have a less-than-perfect credit history as the risk for lenders is reduced because there are essentially two people who are responsible for fulfilling the repayments.

What is a guarantor on a loan?

The guarantor is the person who agrees to repay your loan if you cannot and by co-signing, they are entering into a binding legal contract that states exactly that. If you’re applying for a business loan with a guarantor, it’s crucial that they understand what they are getting into and they’re prepared to cover the monthly instalments if you are unable to.

Who can be a guarantor for a loan?

In most cases, getting a loan with a guarantor involves asking a close friend or family member to take on that role. They will need to be at least 21 years old with a good credit history and they will usually need to be homeowners.

Before applying for a guarantor loan, it’s vital that there is a strong level of trust between both parties. Your guarantor should feel confident that you can pay back the loan without having to rely on them, and you should have faith that they will be willing and able to cover those costs in the event that you do default.

How does a guarantor loan work?

A guarantor loan works in much the same way as any other loan. You borrow a certain amount of money over a set period and pay it back in monthly instalments with interest attached. The major difference is that if you fail to make your repayments for any reason, your guarantor will be responsible for repaying.

Can you have two guarantor loans?

Yes, in theory, you can have two or more guarantor loans. However, it’s important to bear in mind that too many applications in a short space of time could have a negative impact on your credit score and may harm your chances of being approved.

It’s also worth noting that some lenders will only allow a guarantor to co-sign one loan at a time. So, if you wish to take out a second guarantor loan, you may have to find someone else to guarantee those repayments.

What if the guarantor can’t repay the loan?

If your business loan guarantor cannot – or refuses to – make the repayments on your behalf, they risk facing legal action. The lender could be within their rights to take them to court, while your guarantor’s home could be at risk if the property was put up as collateral when the terms of the loan were agreed. Additionally, failure to repay could have a negative effect on your guarantor’s credit rating.

Does getting a loan with a guarantor mean a higher interest rate?

Guarantor loans are usually designed for those with less-than-perfect credit. This means they often come with higher interest rates compared to some alternatives. Of course, the specific rate you receive will depend on a number of things, such as the lender you choose, the amount you wish to borrow, and the period over which you want to pay it back.

What do you need to apply for a guarantor loan?

When you apply, both you and your guarantor will be subject to credit checks. You will also both be required to provide proof of your identity and address as well as evidence that you can afford to keep up with the monthly instalments. This is usually done via the likes of bank statements and payslips.

If you are borrowing on a secured basis, your business loan guarantor may also have to provide details of the asset(s) they are putting up as collateral. For example, this could include an official valuation of their home and information on the amount of equity they have in the property.

What are the pros of getting a loan with a guarantor?

Loaning with a guarantor offers a number of benefits:

• It improves your chances of being approved if you have less-than-perfect credit.
• You may be able to access higher loan amounts.
• Making repayments in full and on time can help you improve your credit score.

What are the cons of getting a loan with a guarantor?

However, as with any financial product, there are also some drawbacks to loaning with a guarantor:

• They often come with higher interest rates than other loans.
• Any difficulties in repaying could harm the relationship you have with your guarantor.
• If your guarantor can’t repay the loan, they risk facing legal action or losing major assets, such as their home.

Do you need a guarantor for a loan?

Guarantor loans are just one of the available options if you’re seeking funding for your business. As we’ve outlined above, they have their advantages and disadvantages, so it’s important that both you and your guarantor are fully informed before committing.

It may be that a guarantor loan is right for you, or you might find that there is another alternative out there that doesn’t require anyone else to co-sign your agreement. For more information about your range of choices, we recommend you check out the various types of fundingwe offer and how we can help you.

And, of course, if you have any questions about anything, please don’t hesitate to get in touch with a member of our friendly team.