If you're looking to buy a car on finance but are struggling to be approved by yourself, you could consider getting a guarantor to help with your application and increase the chance of borrowing.
A guarantor car loan is not too dissimilar to a personal loan; the difference is you have a security blanket behind you if you can't make your repayments for whatever reason.
Before you can be eligible for guarantor car finance, you should appoint a guarantor. Generally, this is a family member willing and able to step in and make any repayments for you if you can't.
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However, not all lenders offer guarantor car finance, so it's worth researching which ones do before applying. If you apply to borrow money from multiple lenders and get rejected, this will appear on your credit history and affect future loan applications.
Not everyone is familiar with guarantor car finance, and it can be confusing as to whom and why one may be eligible for it. That's why we've put together this guide to help anyone looking for help so you can get the best deal possible and the car of your dreams before you know it.
Should you get a guarantor car loan?
If you are consistently being rejected for a loan and have someone willing to act as your guarantor, then there is no reason why you shouldn't get a guarantor car loan.
It will help you get the loan you need to finance your dream car. It's especially important if you require a vehicle to get to and from work, take children to school, and go and get the groceries, among other important day-to-day tasks.
How does a guarantor car loan work?
Guarantor car loans are a type of car finance where you nominate someone with a good credit score - typically a close family member - to make your loan repayments for you should you be unable to, for whatever reason.
Having a guarantor guarantees that if you can't make the payment, you will have someone to step in for you, so you don't end up losing the car or harming your credit score by missing a payment.
It's similar to a personal loan, which is when you take out a lump sum to own a car outright and make fixed payments to repay what you've borrowed. But rather than the loan repayment being down to you, your guarantor is there to make the repayment if you can't.
A guarantor helps lenders allow those with poor or no credit to take out finance on a car as it offers an extra level of security that the money gets repaid should the main driver not be able to do so.
In a typical car finance loan, there are two parties - you and the lender. When you have a guarantor car loan, a third party gets introduced - the guarantor - to help ensure the loan gets repaid.
When is a guarantor loan a good option?
Guarantor car finance is ideal for those with a poor credit history and who cannot guarantee they can make repayments, typically due to missing payments on previous loans or applying and getting rejected by multiple lenders in quick succession.
It's also useful for those without any credit history, such as a young driver that has recently passed their driving test and wants to buy a car. They may not be old enough to present that they have had loans in the past.
Not only can guarantor car finance help the most in need to get a loan, but they can also boost your credit score to give you more options further down the line. Of course, that's only as long as you are making your repayments on time each month.
If you have only recently passed your test, there's a chance that you may only be in your late teens. That could mean that you haven't built up any credit history in the past because you've never had to take out finance on anything before.
Lenders acknowledge and accept that this is typical of a young driver. However, they can still hesitate to offer car finance without evidence of historic repayments.
Having a guarantor tells the lender that you will always make the repayments. Should the worst happen and you are unable to afford to do so, it will be covered by your guarantor.
If you have a parent or family member willing to act as your guarantor, the lender will account for both credit histories before approving the loan. That means if your guarantor has a poor or no credit history, you could still be refused.
People with lower credit scores
If you have a lower credit score and history, it will be more difficult for you to be approved for a loan because lenders need to be confident that you will be able to repay the money they are lending.
That's why a guarantor could be an option as that ensures you get approved for the loan that you require, as they will be there as a backup to help you make a repayment should you be unable to.
What are the risks with guarantor loans?
A guarantor steps in if you can't repay, but they should only agree to be a guarantor if they are confident that the person applying for finance can make the repayments themselves.
That's why there needs to be strong trust between the loanee and the guarantor. Not only should the guarantor be someone you can trust and have difficult money conversations with, but someone financially stable and able to step in if required.
A guarantor is an important role, and if they are required to step in and cannot make the repayment themselves, their credit score and history could be affected, and their house is at risk of repossession if they have a mortgage.
A guarantor should also be between the ages of 18-75 - though most lenders will want someone who is at least 21 and a homeowner - and they must have a good credit history.
The guarantor will have credit checks made on them before the loan is approved, so they need to be confident that they will get accepted, or they risk the whole application getting rejected.
If your guarantor has poor credit, then it's unlikely they will get accepted as a guarantor. The lender needs to be confident that the loan will get repaid by someone.