Guarantor loans are popular among people who may not have a perfect credit rating but nevertheless need access to large sums of money. Applications for guarantor loans usually don’t involve a full credit check because a friend or family member becomes a signatory to the loan, guaranteeing that payments will continue to be made even if the applicant’s circumstances change.
But sometimes the loans can be refused despite the guarantee offered by the third party. There can be a variety of reasons for this and here we look at the most common causes of an application being refused.
The guarantor is unsuitable or rejected:
If you are applying for a guarantor loan then the guarantor must pass eligibility criteria when the lender assesses the application. The most important is usually that the guarantor is a homeowner – using a tenant as a guarantor will sometimes lead to your application being rejected. A guarantor will usually have to be aged between 18 and 75 and not have had significant credit problems in the past. The lender will assess whether they will be able to afford the monthly repayments as well as being able to continue to afford all their other outgoings should the applicant fail to make repayments.
Sometimes, a lender will credit check a guarantor.
Can both parties afford it?
Failing an affordability assessment:
Despite the relaxed lending criteria which normally accompanies guarantor loan application, every applicant is still assessed individually to determine his or her background and personal circumstances. Applicants must be able to demonstrate that they will be able to afford the monthly repayments on the loan without defaulting – simply having a guarantor without being able to show that you can afford the loan will often result in the application being declined. Applicants should carefully consider whether, should a loan be issued and they commit to making the monthly repayments, they will have enough income left over to pay their household bills, shopping, travel costs and so on. If the lender believes that they will not, then the application may be declined.
Failing a credit check:
Guarantor loans are not guaranteed loans. Lenders will still sometimes want to carry out credit checks on individuals making applications. Impaired or even bad credit is often acceptable but the lender will want to know the exact circumstances of previous defaults, judgments or late payments to ensure that these are not likely to be repeated. Often a lender will want to discuss an applicant’s credit history directly, to give him or her the opportunity to explain the background to their less-than-perfect credit profile. Applications are considered on a case-by-case basis and the lender will use their experience to determine the risk that you will fail to keep up with repayments. In these cases, it may not matter how reliable your guarantor’s credit history is, because the lender will still want reassurance that you – the applicant – will be able to make the repayments to avoid it having to contact the guarantor if you do not.
Being dishonest in the application:
Like every other type of lender, those which offer guarantor loans carefully check applications against what is already known about applicants. They are checking to ensure that an application is not fraudulent or that the applicant has not been dishonest, tried to hide certain facts or conceal their real financial circumstances. There is a high likelihood that any attempt to be dishonest will be uncovered and that the application will be refused. Furthermore, if it is suspected that an applicant has been fraudulent in an application, this can mean that he or she will be blacklisted financially, may be refused household or car insurance and, in more serious cases, face a criminal prosecution. It is far better to be completely honest in any loan application – lenders tend to look far more sympathetically on those who are totally up front about their circumstances and are willing to discuss these and find ways forward.
The application is not balanced:
The lender will use a variety of criteria – including credit history, affordability, other loans and credit and income to determine whether both the applicant and the guarantor are able to make the repayments throughout the loan schedule. If the applicant doesn’t have a great assessment score, then the lender will look to make sure that the guarantor does or vice-versa. The lender is assessing whether both parties can make the repayments on time without suffering other financial difficulties. If your guarantor is not in a great financial position then you might want to consider asking another friend or family member to guarantee the loan because it is possible that the lender will decline your application.
The applicant and guarantor are already linked financially:
Having a joint financial relationship with a friend or family member with a joint current account, a loan or a mortgage means that you are linked to that person as far as the credit reference agencies and lenders are concerned. That means that if they make poor financial decisions, these could have an effect on your credit record. It also means that it is unlikely you will be able to use that person as a guarantor on a loan application. Anybody applying for a guarantor loan is likely to have their application declined if they attempt to use their spouse as guarantor or somebody that they hold a buy-to-let mortgage with or a number of other financial products held jointly. All of these will show up on your files held by one of the major credit reference agencies. If the guarantor has already guaranteed an existing loan, then it is also unlikely that you will be able to use that person as guarantor on another application.
Article provided by Solution Loans, a technology-led finance broker specialising in providing expert advice alongside a broad range of financial products – aiming to help you find the most suitable type of credit.