In personal finance, a guarantor loan is a type of unsecured loan that requires a guarantor to co-sign the credit agreement. A guarantor is a person who agrees to repay the borrower’s debt should the borrower default on agreed repayments. The guarantor is often a family member or trusted friend who has a better credit history than the person taking out the loan and the arrangement is, therefore, viewed as less risky by the lender. A guarantor loan can, consequently, enable someone to borrow either more money, or the same amount at a lower rate of interest, than they would otherwise be able to secure through a more traditional type of loan.
Guarantors are often parents who want to help out their young adult children – it could be help raising the deposit for their first home, or it could be to buy a new car or complete a training course that will help them on the next step of their career. There are many reasons why young people may need such help and the fact they cannot obtain a loan themselves does not mean that they are not financially responsible or able to pay back the loan. Although these loans can be used to help provide financially responsible individuals with lending they could not otherwise access, it is important to recognize that they do carry significant risks for the guarantor, who is liable for the full debt amount should the borrower be unable to make repayment.[1] A report suggests that these loans could be as damaging as payday loans, with 43% of guarantors in the study unclear about their financial liability.[2][3]
Guarantor loans are sometimes seen as alternatives to payday loans and associated with the sub-prime finance industry. This is due to them being aimed at people with a less than perfect credit score. This may be because of previously missed debt re-payments.[citation needed] However, this is only one aspect of guarantor loans. They are also aimed at young people who have no credit score, due to having never obtained credit in the past such as new graduates just embarking on their career - these people are often high earners with sensible financial habits so can afford the repayments but do not have the credit history to reassure the lender about the level of risk. As mainstream lending criteria are often automated and does not come with a personal review of the applicant's financial circumstances it is sometimes the only way a young adult in their first job can secure a loan.
- ^ "Loans involving family & friends". ASIC Moneysmart. Retrieved 5 March 2016.
- ^ Cite error: The named reference
BBCwas invoked but never defined (see the help page). - ^ "Guarantors 'Not Fully Aware' Of Loan Dangers". SkyNews. Retrieved 5 March 2016.