Those of us who get into financial difficulty often feel the need to shoulder the burden alone. None of us are perfect with money and sometimes one wrong move can send us from the green, deep into the red. Sometimes it’s a poor choice we made or collection of them. Or it may have been something out of our control such as losing our job due to redundancy. Perhaps we had debt, like most people do, but then losing our job or deciding to go back to full time education caused us to default on debts that we previously had a handle on.
Regardless if it’s our fault or not, pride is something that stops many of us from reaching out and asking for help. Sometimes this is detrimental to our well-being. Regardless how we may feel, we all have someone somewhere who loves us, and cares enough about us to go out on a limb in some small way. The truth is most of us are embarrassed by our financial concerns and want to keep them private. Our money troubles are no different to millions of other people’s, but we all like to give the impression we’re doing well, even if we aren’t.
Lots of people have a financial safety net, it may be a parent, sibling a kind boss, or a friend that seems to have their life together. We may not go to them for money, but we may lean on them in other areas. More often than not, they are happy to help us and would rather see us happy than see us struggle. They may have offered us money in the past, but due to our pride and desire to succeed on our own, we may have turned down their offer. But there is another way they can help in this regard.
What is a Guarantor and how do the loans work?
A Guarantor is somebody who accepts responsibility for a loan, should the recipient fail to pay it back. The Guarantor (or Guarantors, plural) is usually someone close to the person seeking the loan, and wants to help them achieve it instead of lending them the money themselves. In order to be in this position, the Guarantor is usually someone who’s more comfortably off’ financially than the person applying for the loan. And should the worst happen, they’d be prepared to pay the lender back in full and then they will become the ones who are owed the money.
This is a way to help people become responsible for their own finances but without simply passing them the money directly. It allows someone to pay back their own debt, but with a safety net should something go wrong. A Guarantor is often someone who’s prepared to accept this burden should the person they're vouching for fail to make the payments. They are normally doing it for no other reason than kindness and a desire to see the recipient of the loan succeed.
The most common Guarantor is usually a parent, helping a son or daughter build up their own credit rating over time but is prepared to step in if something goes wrong. Other guarantors can be someone’s employer. In this situation they may be training a member of their staff but recognise this staff member is struggling financially. But as a valued member of the team they are willing to help their employee get the credit they need, and if something were to go wrong, they would step in as a Guarantor. They could then take back what’s owed from their employees’ wages over time, in a manageable and affordable way.
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What are the benefits for all involved?
There are several advantages to using a Guarantor for a loan from everyone’s point of view:
- The Lender – The lender themselves are more likely to offer credit as they now know there’s a clear and agreed path to recouping their loan and the interest that accrues. This gives the lender confidence in the agreement. Even if the claimant fails to meet their pay dates, they can simply request the Guarantor pay the money back. From a lender’s perspective it’s risk free.
- The Claimant – Those receiving the loan are much more likely to be approved if they can suggest a willing and reliable Guarantor. This means that should they fail to keep up their payments for any reason, then they are protected from a negative credit history or getting too deep in debt.
The Guarantor will step in and help them, and they can then pay the loan back that way. Although most people who are borrowing don’t want their Guarantor to have to step in, and this is only in a worst-case scenario. They may have a poor credit history and having a Guarantor by their side helps them get approved for credit, and steadily build their rating back up.
- The Guarantor – This initially seems like a thankless task for a Guarantor. What’s in it for them if the claimant defaults? The truth is probably nothing material, but that’s not why Guarantors do what they do. They are often a concerned loved one who simply wants to help another person succeed and get back on the path of financial stability.
If it’s a parent, sibling or friend, they get the peace of mind of knowing someone they care about is going to be okay, and they get to be part of that solution. They may have absolute faith in the claimant and so don’t mind being Guarantor as they know ultimately nothing will happen.
If the Guarantor is an employer, then they may see it in investing in a talented member of their work force, understanding that one day; once they are fully trained and qualified such a debt won’t matter. Many jobs that one day lead to gainful salaries start out this way, but employers have a knack for spotting talent. Helping their employees find stability means they will be more effective team members. They can also always take control of the debt themselves and have their employee pay it back through their salary.
So ultimately everybody wins when you apply for a loan with a Guarantor. If you have someone in your corner than don’t be afraid to ask for their help. Even indirectly by asking them to be a Guarantor. They may want to see you succeed.