Should You Apply For a Loan With Guarantor?

Possibly regarded as a “silent partner”, a loan guarantor agrees to repay a loan in the event that the primary borrower defaults.

The term “silent partner” is a little too ambiguous really to help you understand the function of a loan guarantor, because it may refer either to a “joint borrower” or to a bona-fide “guarantor.”  The two terms and their functions, however, differ dramatically.

A joint borrower, a second primary signer on the loan, shares complete responsibility for the loan’s terms and conditions.  “Joint borrowers” are partners, and for the sake of the loan, the two add-up to one: Together, they have one total income, and they qualify for the loan on the strength of their combined credit rating.  If they default, the lender launches simultaneous collection actions against them.  If joint borrowers default, lenders seize or put charges on both borrowers’ income and assets.

What is a “loan guarantor”?

A “guarantor” has sufficient assets—property, equities, or cash reserves to repay the loan if the borrowers cannot keep up their regular payments.  When you apply for a loan with a guarantor, the guarantor, in effect, says, “Yes, I will pay if they cannot.”

Guarantors typically must prove they have sufficient assets to pay-off the full loan amount plus default penalties.  Lenders may take-back mortgages on guarantors’ properties, exercising their rights of repossession if both the borrower and the guarantor are derelict in their repayment duties. Respectable, reliable lenders require guarantors to secure independent legal counsel and show proof they have met with their solicitors before approving a guaranteed loan. 

Guarantors especially need to know that their agreement to act as a guarantor will limit their own ability to borrow money or secure further credit. When the borrower establishes credit-worthiness with the lender, showing a history of regular payments and substantially reducing the outstanding balance on the loan, the guarantor may apply for release from the obligation.

Benefits of a loan with guarantor

Although lenders grant guaranteed loans for just about every conceivable purpose, they most often allow borrowers to finance home purchases with guaranteed loans.  Very technically, most home mortgages are “guaranteed” by mortgage insurance, but major mortgage lenders also extend credit to first-time buyers whose family members guarantee their loans.  The majority of trustworthy mortgage lenders restrict guarantors to family members; and, in most cases, borrowers must prove they have the capacity to make the regular monthly payments. 

Guarantors typically provide assurance that borrowers can make their installment payments and pay any additional costs associated with a home purchase.  In some exceptional cases, guarantors demonstrate they have resources to provide long-term assistance with monthly payments,

In order to take advantage of current low house prices, you may consider the benefits of a guaranteed loan.  Although you must meet the income criteria and have a reasonably good credit score, applying for a loan with guarantor may help you secure a lower interest rate or make-up for some of the flaws in your credit history.

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