If you are a new single parent, chances are, you will go through a tough period where you will have to watch every penny until you are back on your own two feet. Since separating from your partner and parent of your children usually means splitting all of your possessions, there is a high likelihood, you will need to make changes that will require instant access to money. This could be for home improvements, a car, or other essentials. More often than not, single parents need a loan until they have recovered from their separation or divorce. However, having only one income or having no (or a less than perfect) credit score can make it challenging to be approved for a loan. In that case, you could consider a guarantor loan where a relative or friend vouches for you. As with any loan, there are pros and cons to consider, so let’s take a more detailed look at guarantor loans:
What is a guarantor loan?
A guarantor loan is the same as any other loan, except it requires the borrower to have someone vouch for them financially. This is usually a family member or close friend. These guarantors might have to put up something of their own as collateral. Collateral can be a house, vehicle, or anything of substantial value. If the original borrower fails to pay back the money borrowed, the guarantor will have to cover the payments the borrower has not made, or their collateral can be seized and liquidated. So, the guarantor is fully responsible for repaying the loan and could even see his or her assets seized.
Now let’s take a quick look at some of the pros and cons of guarantor loans to help you determine if this type of loan is right for you.
The pros of guarantor loans
You may qualify with poor or no credit history
Even today, it’s still common that the family mortgage and bills are in his name, leaving wives and partners with virtually no credit history when the relationship breaks down. This is sometimes trickier to resolve than having a poor credit score. Naturally, any lender will check your credit score when you apply for a loan. The good news is, that your credit score doesn’t have to be perfect if you have a guarantor who will step in should you miss payments. In fact, if you have a guarantor to provide you with collateral, lenders often don’t care about your credit history. So having no credit history or a poor history does not mean you are unable to obtain a loan.
A guarantor loan can improve your credit score
Speaking of credit scores, by taking out a loan, and paying it off in a regular and timely manner, will, in actual fact, boost your credit rating. This will help you greatly if you want to apply for a store card, credit card, another loan, or even a mortgage for a new family home in the future.
Applications are often quick and easy
If you have an emergency, you will need cash in hand quickly. Traditional loans can take weeks. If you need money now, fast guarantor loans are your best bet. These loans are processed quicker because you have collateral. Guarantor loans are great for those facing a financial crisis, such as a relationship breakdown, where you have to leave the family home and need money fast.
You can borrow more
You might be able to borrow more money than you would be able to with other types of loans. Your lender has a guarantor, providing peace of mind. So, if you need a larger amount of money, you are more likely to be able to have your loan application approved with a guarantor in the background.
The cons of guarantor loans
If you are the guarantor, you may end up paying back the loan
When the loan borrower fails to make payments, the guarantor must take over the loan. If you are that person, you may lose a large amount of money. Depending on the size of the loan, you may lose your car or even your home. Before signing up to be a guarantor, make sure that the person you are standing up for is trustworthy and in a position to make timely payments.
A guarantor loan can impact your credit score
In the same way that a loan can improve your credit score, it can also negatively affect it if you fail to make payments in full or on time. So, only take the loan out if you are sure, you can fulfil your obligations towards your lender (and your guarantor).
You may ruin your relationship with a loved one
Your guarantor will have to make any payments you have missed and could end up losing a considerable sum of money. Naturally, this will cause discord with family or friends who put their trust in both your willingness and ability to repay the loan. It is likely that your guarantor is a loved one, and you should think carefully whether you would want to risk ruining your relationship with that person. This is something that you must take into account before taking out this type of loan.
Interest rates can be higher
If you don’t have a great credit history, and as a result require a guarantor, your lender is likely to charge a higher interest rate than they would for a standard loan. Make sure you are able to repay the loan in a timely manner, and that you are happy with paying the extra, i.e., the interest your lender charges. This may differ from the rate advertised, so make sure you check the rate you are offered after your application has been approved.
Taking out any loan is a decision that should not be taken lightly. If you are unsure whether you can repay a loan, then think carefully about going ahead and consider alternative options. If, however, you know that your situation is a temporary one that could be resolved with a loan over a fixed period, a guarantor loan might just be the solution for your family. Not only will you have the money you need in the short term, but you will also be able to build your credit history for the future.
If you enjoyed reading our post, why not browse our Single Parent Blog where to you find a wealth of single parent resources, from where to meet other single parents, how to manage single parent finances, where to find support for single parents, single parent dating, and, of course, single parent holidays and solo holidays.