If you are looking to take out a guarantor loan, it is important to carry out the required level of research. There are many good reasons why you should take out a guarantor loan but equally, there will be some reasons why you should avoid this style of loan and focus your energy on another type of loan.
Depending on who you turn to for advice, you may find that you only receive one side of the story. This isn’t enough for you to make a fully informed decision so if you are looking to make your mind up over whether a guarantor loan is right for you, we have the pros and cons of being a guarantor.
The applicant and guarantor should know each other very well
While the main criteria for a guarantor is someone who doesn’t have a direct financial relationship with the applicant, the guarantor and the borrower must know each other. There should be a personal relationship in place and there should be a level of trust between the two parties. This is because guarantor loans are very serious and there are consequences associated with these loans.
If the borrower is unable to pay the loan off, the guarantor finds themselves in a position to pay off what could be a lot of money. There may even be repercussions to their credit status and report if a financial issue remains unresolved in the long term.
With all of this at stake, it is vital that the guarantor knows the person who is applying for the loan and that they trust them. If the relationship isn’t that strong, it may be that acting as a guarantor will cause problems or could cause serious issues to arise at a later date.
Find out the applicant's motives for borrowing money
While many people don’t like to ask personal questions about finance, if you are going to act as a guarantor for someone, it is only fair that you find out why they are looking to request the money. If the applicant is unwilling to provide you with the reason or reasons they have for borrowing money, you shouldn’t be willing to provide them with your backing.
Yes, they may be in a difficult position and they may have embarrassing reasons for their application but if you are placing yourself into the position of providing them with your backing as a guarantor, you deserve to know the full reasoning behind their application.
Can you help them out in another way?
There is a lot to be said for a guarantor loan in that it offers a more attractive rate of APR for most borrowers. People with bad credit scores are unlikely to get a loan offer or they may find that they are being asked to pay a lot of money to service their loan. A guarantor loan will provide them with a better option when it comes to finances, but there may be other ways in which you can provide a person with backing.
Some people may be able to provide the applicant with the funds directly. This should be taken seriously with legal terms drawn up and an agreement about repayment, and even interest, put into place. A loan of any nature should never be a frivolous item but if you have the funds available, it may be best for you and the applicant to create a loan agreement between yourselves as opposed to calling on the services of a guarantor loan firm.
Both parties should also be looking for a better option that may allow them to achieve their goals without borrowing. While guarantor loans are often a smart and sensible option, they aren’t the only option when it comes to finance. Even if you do decide that a guarantor loan is the best option for your needs, you should try to review all of your options before committing.
The role of the guarantor is crucial in a guarantor loan, as the name suggests. There is no getting away from the importance of this role and the impact that a guarantor loan can have on the lives of people involved with the process. When it comes to making the right decision, it is best to fully think about what is on offer and what the best solution for everyone is.
Choosing to become a guarantor for a loan is a significant decision with lasting implications for both parties involved. While there are compelling reasons to consider acting as a guarantor, it's crucial to undertake thorough research and evaluation before committing to such an arrangement.
A fundamental aspect of being a guarantor is the existing relationship between the applicant and the guarantor. Trust and familiarity are essential, as the guarantor assumes substantial financial responsibility in the event of default by the borrower. Therefore, both parties must have a deep understanding of each other's financial circumstances and motives for borrowing.
Moreover, transparency regarding the borrower's financial motives is paramount. As a guarantor, it's reasonable to seek clarity on the borrower's reasons for seeking the loan. This ensures that both parties are fully informed and aligned in their expectations.
Exploring alternative forms of financial assistance is also prudent. While guarantor loans offer favorable terms for borrowers with poor credit, direct financial assistance or exploring other lending options may be more suitable in certain circumstances. Careful consideration of all available options is essential to making an informed decision that best serves the interests of both the borrower and the guarantor.
Ultimately, the role of a guarantor carries significant responsibility and should not be taken lightly. By carefully weighing the pros and cons and assessing the suitability of the arrangement, individuals can make informed decisions that align with their financial objectives and obligations.
