A guarantor loan is a unique type of loan where money can be borrowed by someone with a poor credit rating and they will nominate a guarantor who will cover any payments that they miss. This can feel like a less risky type of loan because there will be less risk that the repayment will be missed. This can be a big advantage. However, there are still some risks of this loan and it is worth understanding them so that you can decide whether you think that they are relevant to you and to consider what you can do to reduce the risks.
Risk of not being able to repay
With all loans, there will always be a risk that you will not be able to make all of the repayments. There are ways that you can lower this risk though. Firstly, if you choose a bad credit loan where the repayments are small but there are more of them, then this might mean that you will be able to repay them more easily compared with having larger repayments. It is therefore well worth making sure that you are aware of how much the repayments will be. You will then be able to calculate whether you will be able to afford them. You can do this by taking a look at your previous bank statements and seeing how much money you would normally have available and whether this would be enough to repay the loan. Although you have a guarantor to help you, it is worth understanding that a missed payment by you will still be noted on your credit report and it may mean that you incur extra charges on the loan. It is also likely that you will not want your guarantor to have to pay for you unless you really have to.
Risk of guarantor not being able to repay
There is also a risk that the guarantor may not be able to cover the cost of their repayment. This is less likely as you would hope that they would check this before they agreed to sign up. However, they may have just assumed that they would not need to make any repayments and so not allowed for it. It might be worth you checking with them before they sign up and making it clear that you want them to check that it will be something that they can afford. There is a small chance that they may need to make every repayment and they will need to be prepared for this.
Risk of falling out with guarantor
If your guarantor has to make a repayment or more than one, they may have expectations that you will repay them as soon as possible. If you cannot afford to do this then they may not be happy with you, especially if they are getting into financial difficulties as a result. Therefore, it can be good to avoid this by having an agreement before you sign the loan agreement. It is a good idea to get together and discuss what your expectations would be in the case of them making one or multiple repayments. They might be happy to just cover the cost and not expect you to pay them back. Whereas it is more likely that they might want their money back. It would be sensible to come to an agreement that you repay them once you have paid off the loan, so that you can afford it. If you have to make the loan repayments and repay your guarantor as well, you might find it a huge financial struggle. It can therefore be worth trying to explain to them that you will be better off repaying it at the end. Ideally you will come up with something in writing so that you can refer back to it if there is ever any disagreement about it. It is also wise to carefully choose a guarantor that you know will be easy going and is unlikely to fall out with you over these sorts of things.
Risk of falling out with others
There is a small possibility that others may fall out with you over this as well. This is because you might find that they will be jealous. If they want a guarantor loan as well, but cannot use the guarantor you have used because they have signed up to help you, they might be jealous that you will be getting help and they will not be. This will only happen if they find out about your arrangement, if they need the same sort of help and cannot get it and if they are the jealous type. However, it is worth thinking it through as it could lead to a difficult situation and you will not want this to happen to you.