What Is An Unsecured Guarantor Loan and Should You Consider It?

Maybe you received a loan rejection or know you have poor credit. Perhaps you have a startup idea and need a small business loan. Regardless of your situation, an unsecured guarantor loan can seem like the ideal solution.

While these loans are less risky for the borrower, there are still consequences for nonpayment. Learning everything you can about guarantor loans will help facilitate your decision.

What Is an Unsecured Loan?

Secured loans are attached to physical assets the loan borrower can use as collateral. For example, a mortgage loan for a house uses the home as collateral. If the borrower fails to repay the loan, the lender can re-sell the home to make up for nonpayment.

On the other hand, an unsecured loan has no attached collateral. The lender thus has a higher risk of not receiving payment from the borrower. However, a lender can still pursue legal action if the borrower doesn’t comply with payments.

How Unsecured Guarantor Loans Work

What is an unsecured loan and how does it work? An unsecured guarantor loan implies that a second party adds their name to the loan.

If you have poor or no credit history and know someone who doesn’t, taking out an unsecured loan together would make the other person the guarantor. You will remain the primary borrower on the loan.

An unsecured guarantor loan has no collateral and relies on a financially stable guarantor. Your guarantor may choose between guaranteeing the entirety of a loan, or a part of it.

If you miss a loan payment or several, the lender will first seek other ways to get the money back. As a last resort, the lender will expect your guarantor to make your missed payments.

Loan Guarantor vs Cosigner

A guarantor loan meaning is different from that of a cosigner loan. When you have a cosigner on a loan, both parties are equally responsible for paying it back.

On the other hand, loan guarantor responsibilities are limited to paying when the main borrower cannot. If you take out a loan with a guarantor, you’re still the one on the hook for repayment. Your guarantor only makes the loan less risky for the lender by agreeing to pay when you miss a payment.

How To Apply for a Guarantor Loan

There are a few steps involved in knowing how to apply for a guarantor loan. The first step is knowing how to get a guarantor for a loan. While almost anyone can be your guarantor, the person must meet the lender’s prerequisites.

Typically, these are as follows:

  • An age of 21 and over
  • Have a high credit score
  • Meet a certain threshold for annual income (this will vary by lender)
  • Proof that they can comfortably pay for the main borrower
  • Proof of residence in the country

After you secure a guarantor, the next step is to do some research. Compare different guarantor loans to see which is the most convenient for your situation. You will want to ensure you are eligible for the one you choose.

Lastly, weigh a guarantor loan against other potential solutions. Sometimes, a bad credit loan may be an option. When you’re sure you and your guarantor are comfortable with a loan’s conditions, apply for the loan.

Pros and Cons of Unsecured Guarantor Loans

Applying for an unsecured guarantor loan has several advantages and disadvantages. It’s a decision you must weigh carefully.

Pros of an Unsecured Guarantor Loan

The following are the top reasons an unsecured guarantor loan may be a good idea.

No Need For Credit

If you lack credit history, you will benefit immediately from having a guarantor with excellent credit. You won’t have as many prerequisites to worry about and your guarantor’s credit will essentially make up for yours.

You’ll Pay Less

Because having a guarantor reduces risk for your lender, the price of the loan will drop. Paying less on a loan is an attractive incentive particularly if you have bad credit.

Less Interest, Larger Loan

A guarantor provides lenders with a guarantee that loan repayment will occur more smoothly. Thus, a guarantor loan will have a reduced interest rate. You may also enjoy a larger loan amount thanks to having a guarantor.

No Collateral

You won’t have anything taken away if you miss a loan payment. With an unsecured guarantor loan, there is no physical asset a lender can take or sell to pay your debt. This is especially crucial for businesses since you won’t have to give up any part of your business to pay the loan.

Cons of an Unsecured Guarantor Loan

Despite its plethora of benefits, unsecured guarantor loans don’t come without risk. Here are some of the downsides.

You’re Tied To Your Guarantor

If something goes wrong and you can’t repay your loan, your relationship with the guarantor may suffer. For this reason, you should choose your guarantor wisely and consider the risks of compromising the relationship.

A Guarantor’s Credit May Decrease

The guarantor takes a substantial risk in accepting to guarantee your loan. If there is a default payment, remember that it will reflect badly on both your credit report and your guarantor’s. Someone with a high credit score may thus not want to take on such financial responsibility.

A Need for Private Information

The stakes are high when you’re guaranteeing a loan for someone else. That means your guarantor will likely ask you for personal information to ensure the risk is worth taking. You may need to provide details about your bank account and finances to the guarantor so they can weigh the decision.

Higher Rates Than Secured Loans

While it’s true that unsecured guarantor loans are one of the best options available to those with no credit, it’s still not always the optimal choice. With a secured loan, you’re more likely to see lower rates than with an unsecured one.

What Are the Alternatives To Unsecured Guarantor Loans?

Alternatives to guarantor loans vary and depend on factors like the loan type, your credit history, and your ability to secure a guarantor. Some factors may limit your ability to secure other loans such as small business loans.

Unsecured Loans Without a Guarantor

You may not necessarily need a guarantor for an unsecured loan. While it increases your chances, you should first check your credit score to make sure. Often, you may be able to obtain an unsecured loan yourself.

Secured Loans

If you’re certain you can repay your loan, obtaining a loan with collateral is a good option. If you need a loan for a very high amount, it may be worth looking into this option.

Bad Credit Loans

Options exist for high-risk borrowers. If your credit history isn’t ideal, you can still obtain a loan yourself. However, consider that these loans are riskier for the lender and will come with a hefty interest rate and limitations.

Credit Unions

Check your location for credit unions. These entities act as non-profit organizations and offer local individuals saving or lending options. Credit unions often have prerequisites, such as doing work in the nonprofit sector. Check requirements before applying.

Click here for more details on financing options or call 214-629-7223 or email jthomas@fmconsulting.net for more information. Or, apply now.

An Outsourced CEO and expert witness, Jim Thomas is the founder and president of Fitness Management USA Inc., a management consulting, turnaround and brokerage firm specializing in the gym and sports industry. With more than 25 years of experience owning, operating and managing clubs of all sizes, Thomas lectures and delivers seminars, webinars and workshops across the globe on the practical skills required to successfully overcome obscurity, improve sales, build teamwork and market fitness programs and products. Visit his Web site at: www.fmconsulting.net or www.youtube.com/gymconsultant.

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