Getting approved for a car loan can be difficult, particularly if you have bad credit, are a young driver or are buying a car for the first time. In such cases, a guarantor may be required to help secure car finance. A guarantor is a person who agrees to pay back the loan if you do not. When, however, does a guarantor become necessary?
Read on to find out when you might need a guarantor and how to work out if you need one for your car finance application.
If you want to explore car finance deals at carmoney.co.uk or other brokers, learning more about how a guarantor works can help you navigate the financing process with more ease.
What is a Guarantor?
A guarantor is an individual—usually a family member or close friend—who promises to make payments if you cannot. A guarantor is used by lenders to reduce their risk when lending money to someone who may not meet their usual eligibility criteria. Often, the guarantor’s credit history and financial stability are a big part of the approval process.
The Guarantor’s Responsibilities
The individual serving as a guarantor is legally responsible for repayment of the loan if the borrower defaults. Depending on the circumstances, this responsibility can include making monthly payments or paying off the loan in full. The guarantor’s credit score can be negatively impacted if the borrower fails to meet their obligations.
When is a Guarantor Needed for Car Finance?
There are a number of reasons why a guarantor may be needed for car finance. Each case is unique, but common scenarios include bad credit, young drivers and first-time buyers. Let’s explore each of these cases in more detail.
Bad Credit
Having bad credit history is one of the most common reasons for needing a guarantor. People with low credit scores are often seen as high risk borrowers by lenders, who may deny the loan or charge higher interest rates. In these cases, a guarantor offers additional security to the lender. The guarantor offers their own good credit history to reduce the risk and increase the likelihood of approval.
Young Drivers
Young drivers find it hard to get car finance because they have no or very little credit history. Lenders are very dependent on past borrowing behavior to determine risk, so an absence of a credit history can be viewed as a negative. A guarantor, with a good credit record, helps to reduce the risk to the lender and assure the loan will be repaid.
First-Time Buyers
If you’re buying a car for the first time, you might not have much credit experience. In these cases, lenders may ask for a guarantor to make sure the loan is repaid, especially if the buyer is young or has a short credit history. A guarantor with experience with credit and a good financial record can support a first-time buyer.
The Benefits of Having a Guarantor
It may seem like a hassle at first, but the need for a guarantor actually has its advantages for both the borrower and the lender.
Easier Access to Car Finance
If you fall into a higher risk category, a guarantor will significantly increase your chances of getting a loan. If your credit score isn’t the best, you may find that with a guarantor lenders are more likely to approve your car finance application. It can lead to more affordable financing options and better terms.
Better Loan Terms
Lenders may offer better interest rates or more flexible repayment terms when a guarantor is involved. This often means lower monthly payments, less stringent terms, and perhaps even a better loan amount.
What to Consider Before Becoming a Guarantor
If you are thinking of asking someone to be your guarantor or if you are thinking of becoming a guarantor for someone else, it’s important to know the risks.
The Impact on Credit
It’s a big financial responsibility to take on as a guarantor. If the borrower does not repay the loan, the guarantor’s credit score will be damaged. They may also be forced to pay the loan, putting them under financial strain.
Open Communication is Key
Before asking someone to be a guarantor, have an open discussion about what the risks and responsibilities might be. Make sure that both parties know what the commitment is and agree on the terms.
Alternatives to Using a Guarantor
If you cannot find a guarantor or do not want to involve anyone else in the loan process, there are other options available.
Explore Specialist Lenders
There are some lenders who will give car finance to people with poor credit, young drivers or first-time buyers without the need for a guarantor. Finance brokers can help people find lenders and car finance deals that suit their needs.
Save for a Larger Deposit
A larger deposit can also lower the overall loan amount and indicate to lenders that you are financially responsible. In some cases, you may be able to avoid the need for a guarantor altogether by putting down more money upfront.
Understanding the Need for a Guarantor in Car Finance
In many cases, a guarantor can make all the difference when applying for car finance, especially for individuals with poor credit, young drivers, or first-time buyers. A guarantor provides security for the lender, improving the chances of approval and potentially securing better terms. However, it’s essential to understand the responsibilities and risks involved for both parties. If you’re unable to find a guarantor, you can still explore other car finance options tailored to your circumstances. By exploring car finance deals, you can find a solution that works for you, whether you need a guarantor or not.
