It is not difficult to guess that applying for a loan with a guarantor improves your chances of being approved. You are likely to benefit from better terms and conditions, including lower interest rates, even if your credit score is fair.
You should not confuse the terms ‘joint borrower’ and ‘guarantor’. If you have a partner and decide to apply for a loan jointly, you will have to qualify together. Moreover, you will share equal responsibility for making joint payments.
So, what is a guarantor, to begin with? This can be a company or a person guaranteeing that your loans will be repaid promptly in case of default. This means that a third party agrees to pay the debt of a borrower who fails to do so. Cosigners are also considered guarantors, including parents who are cosigning a student loan for their children. Some lenders may restrict the term ‘guarantor’ to family members, which is understandable. Your parents will do their best to support you and will be more understanding if you cannot maintain your payments.
When you apply for a loan with a guarantor, this person will sign a separate loan contract. Then, both of you will go through a qualifying process separately, with the lender conducting a credit check for you and the guarantor. The lender will need assurance that your consignor or guarantor will pay your loan back if you are unable to maintain payments.
Business owners and individuals can have a guarantor when applying for financing. In addition, you may have more than one guarantor. If you have multiple guarantors, you should know that everyone of them is liable for the full debt amount. Some creditors require that the guarantor is responsible for a certain amount of money, which is a percentage of the loaned amount. In this way, they can rest assured that the money they have loaned is recoverable.
To apply for a loan, you should have a clear purpose for using the money. Lenders extend loans for a variety of purposes but most often, they approve applicants who finance home purchases.
On the other hand, having a guarantor does not guarantee that your application will be approved. This is especially true if your guarantor is not regarded creditworthy by your financial institution, meaning that in the eyes of the lender, they won’t be able to make good on your debt. Thus, you should make sure your guarantor of choice has excellent credit and payment history.
Finally, your financial institution may prefer that you are a homeowner who can show a history of compliance with payments. The property offers security against the loan you are applying for while the fact that you were making regular payments means that you have a good credit standing. If you are living with your parents or in a rented accommodation, you will find it more difficult to obtain financing. In this case, you will need to have a guarantor or you may be required to present some collateral as a guarantee that your bank will recover the money loaned.