A guarantor loan is a type of unsecured loan that requires a guarantor to sign a credit agreement. The guarantor is the person who agrees to pay the borrower's debt if the borrower fails to pay the agreed installment. Guarantor is often a family member or trusted friend who has a better credit history than the person who took the loan and the arrangement, therefore, is considered less risky by the lender. Thus, a guarantor's loan may allow a person to borrow more money, or an amount equal to a lower interest rate, than they can get through a more traditional type of loan.
Underwriters are often parents who want to help their young adult children - it can help increase savings for their first home, or it could be to buy a new car or complete a training course that will help them in the next step of their careers. There are many reasons why young people may need such help and the fact that they can not get the loan itself does not mean that they are not financially responsible or able to repay the loan.
Guaranteed loans are sometimes seen as an alternative to payday loans and are linked to the sub-prime finance industry, as they are addressed to people with less than perfect credit scores, because of missed payments against debt in the past. However, this is only one aspect of the guarantor loan. They are also aimed at young people who have no credit score, having never gotten credit in the past like new graduates who have just started their careers - these people are often high earners with financial habits that it makes sense to be able to pay the mortgage but has no credit history to convince lenders of the level of risk. Since mainstream lending criteria are often automated and do not come with personal reviews of the applicant's financial circumstances, sometimes the only way young adults in their first job can obtain a loan.
Although the guarantor is a relatively new introduction to the unsecured loan market, it is not uncommon for people to be guaranteed to sign other forms of financial arrangements, such as in rental contracts where young people without prior references are often required to provide guarantor and in industry mortgage, where the guarantor is often used to help people obtain a mortgage when they are declared to be rejected as a credit risk.
Since the global financial crisis that began in 2008 there has been a rapid growth in various personal loans such as guarantor loans that can be classified as alternative loans. These are loans not acquired through the traditional sources of major banks or other lending institutions such as community building but more specifically through loan brokers and specialized lenders. There are many reasons why people are increasingly choosing unconventional loans but the two biggest ones, so far are the lack of availability and cost.
The strict lending criteria implemented since 2008 means that anyone with no credit history or an imperfect credit history can not get a bank loan at all or just be able to obtain a loan at high interest.
However, guarantor loans are by no means a panacea for this situation - they themselves have high interest rates well above standard personal loans (albeit in shorter periods) and pose a risk to guarantor who may not be fully aware of their commitments. Anyone who is asked to act as a guarantor on a loan should ensure they fully understand their own responsibilities.
These loans are sometimes used by angel investors to help startup companies where investors are unwilling or unable to provide direct funding.
Although these loans can be used to help provide financially responsible individuals with loans they can not access, it is important to know that they still carry significant risks to the guarantor, who is responsible for the full amount of debt if the borrower can not repay. A report indicates that these loans could be damaging such as payday loans, with 43% of guarantors in the study unclear about their financial obligations.
Video Unsecured guarantor loan
Consumer demography
Users of guaranteed loans are often the ones that will be rejected by major lenders, such as banks and credit card providers, for having less than perfect credit score or no credit history at all, like young people just starting out in their first job. In the UK alone, for example, there are about seven million consumers who will not qualify for bank loans due to their credit score or lack of credit history.
Some guarantor credit companies aim to position themselves as a better alternative to payday loans, by offering loans at lower APRs than those offered by payday loan companies, while still higher than the main credit consumers who can access through the major banks.
Maps Unsecured guarantor loan
See also
- Alternative financial services
- Surety
- Payday loans
- Personal warranty
References
Source of the article : Wikipedia
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