When you’re looking for car finance, a history of poor credit or even no credit can make it more challenging.
You could struggle to get accepted or to find a deal with a good interest rate. One of your options is to bring a third party in to act as your guarantor.
What is a guarantor?
A guarantor is someone who will ‘guarantee’ your car finance. That means they agree to repay the total amount owed on the car if the borrower can’t afford to pay or hasn’t paid what they owe.
They effectively become a safety net for the loan and missed payments that may occur.
Who benefits from guarantor car finance?
Guarantor car finance is appropriate for those who may struggle to get approved for a loan otherwise.
If someone has a bad credit rating, for instance, any history of frequently missing payments or defaulting, lenders may deem them too much of a risk to lend to.
Having a guarantor minimises that risk.
It’s not only suitable for those with bad credit either. It can be helpful for young drivers who may not have built up enough of a history of borrowing and repaying debt for a lender to be able to judge their risk. Or, for those who don’t have a regular income, having a guarantor can boost your chances of being accepted for car finance.
How does guarantor car finance work?
Guarantor car finance works exactly the same as regular car finance except there’s a third party involved.
If you’ve done an eligibility check to find out if you’ll get car finance and it looks as though your chances are slim, a guarantor loan can help you get accepted.
You’ll still need to make monthly repayments over an agreed term, but as soon as the agreement is signed, as long as all the repayments are made on time, the guarantor should have nothing more to do with the loan.
The guarantor is there to reassure the lender that the finance will be repaid on time and in full.
If you don’t make a payment, they agree to take final responsibility for your loan and will pay on your behalf.
Who can be a guarantor?
Guarantor eligibility varies between lenders. However, in general, a guarantor can be almost anyone over 21 – some lenders may accept those over 18.
Although a guarantor is usually a family member or a close friend, people who are financially connected to you – such as a spouse or partner with whom you have joint finances – are generally not allowed to be a guarantor on your loan.
A guarantor needs to be someone with a good credit score and a good credit history of making regular repayments.
Ideally, the guarantor will be a homeowner; however, sometimes lenders will accept someone who isn’t but has lived at the same address for a set number of years.
The guarantor, like the borrower, will also need to be part of the application process, providing information and documentation about themselves and their financial situation.
What are the pros and cons of a car finance guarantor loans?
Like any financial decision, you should weigh up the pros and cons of having a guarantor for your car finance.
- Unlike standard car finance, those with no credit history or a bad credit rating have more chance of securing a loan with a guarantor
- A guarantor on your loan may mean you can borrow more money and purchase a larger or better vehicle
- By keeping up your repayments on your guarantor car loan, you can build your credit score, meaning in the future you could be able to qualify for car finance on your own, as well as other credit such as a mortgage
- If you have bad credit, you’ll have to be open and talk about your financial situation to explain it to your potential guarantor, which some may find uncomfortable
- Both the borrower and the guarantor could significantly damage their credit scores if the loan terms aren’t adhered to. At worst, they could face legal action
- Defaulting on your loan may ruin your relationship with your guarantor (potentially a close friend or family member) if you haven’t discussed it thoroughly
Do I need a guarantor for car finance?
If you have good credit or think you have a good chance of acceptance, you can apply for car finance without using a guarantor. So it depends on your circumstances. Those with bad credit can still get car finance, but they may struggle to get accepted or get the terms they want.
For young drivers, your age could be against you, especially if you haven’t had a chance to build up a credit history or you don’t have regular employment yet.
Remember, if you’re not sure you’ll get accepted for car finance on your own, submitting many applications will damage your credit score, so it’s always best to check your eligibility first.
What are the alternatives?
If a guarantor loan isn’t an option, there are alternatives out there that could help you get on the road with car finance.
- Build your credit rating – If bad credit is holding you back, you could look to build your credit rating before applying for car finance. You can take several steps to boost your score, from registering on the electoral roll to paying down balances.
- Use a specialist lender – Another alternative is to look toward lenders that cater to younger drivers or those who have poor credit.
If this sounds like it could work for you, Hippo can help. We can run a soft credit search for you to find out what your options are without affecting your credit score.
With access to a large range of lenders, we can find one that we think will offer the best finance option for your circumstances.
Interested in finding out more? Or want to explore your options? Try our soft credit search or get in touch with our team to find out if we can help you secure car finance either with or without a guarantor.