Guarantor Loans vs. Co-signed loans: Spotting the Main Differences

Now that coronavirus has changed the course of all things, especially in the financial sector, the public have been left behind with several financial needs. Some are thinking of asking for a new line of credit, some others prefer to stay just where they are at the moment. Moreover, if you are looking to apply for a loan, it might be worthy to spot the differences between two of the most popular loans now: guarantor loans and co-signed loans. Lets navigate then trough what they offer.

Both kinds of loans have similarities, as they can help people to get a loan if their credit ratings are not healthy enough. 

What is a co-signed loan?

A co-signer is a person who is responsible for a loan if the borrower is not capable of paying it back. To this extent, this type of loan is very typical for people with a very new credit history, who need an extra help to apply for a new line of credit. A good example of this could be a student loan, as a wide range of students is nowadays applying for loans to pay for their degrees. They do need someone who stays there, as they do not have a long and clear record of financial history. Some benefits of co-signing are:

• It allows the borrower to obtain a line of credit, which could not have got on his own.
• Normally they have low rates or fees if the co-signer has a good credit history. 
• Co-signed loans can prevent the borrower from other not-so-secure practices, such as payday loans of shark loans.

On the other hand, a co-signer must provide all requested personal and financial information to the lender as if he/she was the primary borrower. The co-signer could be a relative to you, who has a good credit rating. To sum up, if someone co- signs a loan they just as responsible for the loan as the original borrower, and this must to be written somewhere. Therefore, some cons of co-signing a loan are:

• The co-signer is responsible for the loan if the borrower cannot afford the payments. 
• Co-signers do not get anything from the loan, just risk. 
• This could damage your relationship with the borrower.
• It may also affect your credit. 
• You, as the co-signer will have to keep an eye on the payments to make sure the whole process is functioning. 

What is a guarantor loan?

Being a guarantor on a loan is a very similar practice than to being a co-signer on a on loan. It basically means that if the initial borrower can’t afford the loan payments, the financial institution or the lender will demand those payments from that guarantor person. The guarantor person must provide their financial details in order to provide liability to the lender. A clear example of the figure of a guarantor is if someone goes to let a flat or house, the landlord will probably require a guarantor to make sure that the rent will be paid. The key difference with co-signers here is that is one payment is not received, the lender will pursue directly to the guarantor for that payment, forgetting about the borrower. In a co-signed agreement, if something goes wrong, the lender will pursue both the signer and the co-signer straight away.  

Pros and cons of a guarantor loan: 

Pros:

• People with a poor credit history are able to secure a guarantor loan.
• You will be able to access to a higher quantity of money with this type of loan. 
• You can build up some good credit from there. 

Cons:

• Guarantor loans have very high interest rates.
• If you cannot afford to payments, this could affect negatively your credit rating.

To finish up, it is up to you and to your personal circumstances to figure out what kind of loan fits your needs. We now that is not the perfect time to run financial risks, but if you have to do it, do it in the best possible way.