Guarantor loans are a type of loan wherein a third party, or guarantor stakes their own finances as collateral on a deal between a lender and a borrower (usually having low or no credit at all). They are ideal for a young, unestablished borrower to make a larger investment, such as a house or car. Before getting into a guarantor loan, one must determine whether this is a good idea. Here are some risks involved with such an agreement.
This one definitely falls under the “fine-print” category. Guarantor loans may be specified as a limited, or an unlimited guarantee. An unlimited guarantee states that the terms of a guarantor loan may be altered as necessary. For example, if a borrower has initially taken out a loan to buy a boat, they can, through an agreement with the lender, have the loan instalments increase to cover docking fees, repairs and a myriad of other expenses that come along with boat ownership. Make sure you know whether you are going into a limited or unlimited guarantee. More details!
Expect The Unexpected
Hope for the best, but plan for the worst. Take your time going over your own finances, the current climate and projections for as long as the loan is stated to last. Furthermore, think hard about the individual who you are guaranteeing. What is their income situation? How are they with money? How well do you know them? In other words: do you trust them? If you end up being on the hook for their loan repayment, will you be able to supply it?
Guarantor Loans Can Affect Your Credit Scores
If the borrower that you vouch for fails to uphold their end of the agreement, you are responsible for AT LEAST the remainder of the loan (compare guarantors and co-borrowers), but this will likely have other lasting consequences. Your credit score may plummet due to this poorly executed agreement. Basically, your appearance to banks and other financial situations will diminish greatly, and it will become much harder for you to apply for a loan yourself.
More Risks To Consider
If you you’re still looking for reasons not to enter into a loan as a guarantor, good job, you are thinking shrewdly. Here are a few other points to mull over before signing on the dotted line.
-What Is The Nature Of The Loan- Don’t just take the bank or the borrower’s word for it. Study the terms of loan and how it shapes up against the borrower’s income. Ultimately, this is your name and your money you are putting up. You should feel free to express doubt or concern. Financial deals like this can be predatory. Don’t get taken for a ride.
-Is It Worth It?- Is it worth risking financial ruin? Is it worth losing a friend? Chances are that you are not the borrower’s only option as a guarantor, so don’t burden yourself with a duty that isn’t necessarily yours.
These risks should inform your choice of going into a loan as a guarantor, but they are only an introduction. It’s never a bad idea to talk to a financial advisor before going into such an agreement. Loans with a guarantor are sometimes necessary for individuals with low credit rating, but if not researched diligently it could leave you in the same, or worse position. Click here for more information: https://www.bbc.com/news/business-33555764