Understanding guarantor loans
Here at anytypeofloan.co.uk we get asked lots of questions about Guarantor Loans and whether any individual can obtain finance, even though their financial situation may dictate that they can’t or rather they cannot through the old traditional means.
A guarantor loan is much like any other loan in that it is a sum of money borrowed by an individual repaid over a period of time. The loan itself is unsecured and this means that the lender lending the money has no security over the money they have lent out. In other words, if the borrower decides not to repay or can’t repay the loan, then they have no recourse or way of getting their money back, apart from the usual legal demands for full repayment. This is why this type of lending is considered to be risky from a lenders point of view.
It differs from a secured loan because lenders can apply to reposess a property in lieu of full repayment for the loan if the borrower defaults on the loan. Secured loans and mortgages are just two types of secured loans.
This is also why guarantor loans came into existence.
A guarantor loan works in exactly the same way as a traditional loan (mentioned above) but the main difference is that the person borrowing the money is not the same person that the lender is lending to. Confused? Read on for a more detailed explanation.
The borrower applies for the loan. The lender asks for a guarantor to endorse the application. This guarantor will be someone in full time work, employed, a homeowner and with a decent credit history. Most guarantors are family members, friends or other people well known to the borrower.
The lender then assesses the loan application on the ability of the guarantor to repay the loan, not the borrower. If all ok, the money is paid into the borrowers account and the borrower makes all of the repayments on the loan over an agreed period of time. Only if the borrower fails to make the repayments will the guarantor come into play. The guarantor is ultimately responsible for the loan meaning that if the loan is in default and needs to be repaid, then the guarantor will have to pay it, not the borrower. Likewise, if the case came to court, the court would rule that the guarantor is completely, 100% responsible for the loan, not the borrower.
Hence, any individual agreeing to become a guarantor will have to be aware that they are legally responsible for the good conduct and ultimately, the repayment of the loan. The initial applicant or borrower is simply someone who will be providing the bank details to pay the loan into…it is not their loan and under the guarantor loan rules, it never will be.
