Guarantor loans are often seen as an affordable solution to your financial troubles with better offers from lenders.
Your credit history and loan affordability are no longer the important factors determining the loan terms.
However, there are certain drawbacks of a guarantor loan that should be considered before signing the application form.
Guarantors and borrowers are both liable for the repayment of a guarantor loan. Therefore, there are troubles for both the entities that may cause them to change their view about the guarantor loan.
After all, a lower interest rate doesn’t always promise a great borrowing experience from the lender.
Drawbacks of Guarantor Loan for Borrower
Guarantor loans are helpful to reduce the instalments and interest rate on your loan application.
However, the process is not easy for the applicants because of a major requirement, the guarantor.
Do check the following drawbacks of a guarantor loan before making a decision.
1. Not Easy to Find the Ideal Guarantor
The task to find the ideal guarantor with the perfect credit profile is not easy. You need to search the social group for someone who has a good income and no loan defaults.
Therefore, it may take some weeks to find the right person to become a guarantor.
You have no idea about their reaction to the request of becoming the lender. Some people avoid the risk and troubles of being the guarantor, even for their family.
Thus, you may face huge troubles and disappointment while searching for the ideal guarantor to get better interest rates.
2. Increased Stress of Repayment
Debts come with the stress of repayment because of the numerous consequences. You will indeed try hard to avoid the defaults with repayment on time.
However, the defaults with a guarantor loan will not affect your credit profile.
You don’t want the guarantors to repay the loan because of your financial inability. Their credit ratings will get affected if they miss the instalments.
More importantly, it makes no sense to make them go through the loan repayment troubles after your fund mismanagement.
3. Relationship at Risk
Your relationship with the guarantor is at serious risk because of the guarantor loan. It will get spoiled if they are forced to repay the loan on your behalf.
Thus, you should measure the risk by considering the relationship at risk.
It may lead to an awkward situation if the other person refuses to become your guarantor.
You cannot blame them if they think you are not good with the money based on your past decisions. Though, people often let these decisions affect their relationship even if they are reasonable.
4. Sharing the Financial Troubles
For some individuals, it is not uncomplicated to share their financial troubles with other people in their life.
You may feel the same about the money conversation with your loved ones. It is nothing right to feel this way because the conversation is indeed uncomfortable.
Their support will ensure you don’t end up in the same situation again because of an unhealthy lifestyle.
Thus, the money conversation is helpful to find the guarantor and help with money management.
5. Alternatives are Available
Alternatives are available of a guarantor loan to get approval or better interest rates from banks.
You can use any valuable asset as a loan security for a secured loan from a lender. They will offer a loan amount less than the value of the asset to ensure the recovery of the loan amount.
Moreover, you can get short term loans in Ireland from direct lenders with no guarantor and security. Your credit history will not affect the loan application as long as the instalments are affordable.
Therefore, you can avoid the troubles because of a guarantor loan with the available alternatives.
Drawbacks of Guarantor Loan for Guarantor
Guarantors are risking their financial condition for the borrowers. There are more drawbacks for them than benefits.
Following are some drawbacks to consider if someone has approached you to become a guarantor –
1. You are Liable for Repayment
As mentioned above, the lenders will find you liable for the repayment if the borrowers miss the payments. It is a huge commitment with serious financial consequences. You need to manage the instalments to avoid a default in your credit record.
Thus, a guarantor loan may result in financial troubles for you. You should prepare yourself for the situation in advance to avoid a crisis with a cash shortage.
Even if they can afford the loan amount, the borrowers can still default on the loan because of an unexpected situation.
2. Credit Rating Will Take a Hit
Another possible consequence of loan default from the borrower is the negative impact on your credit rating.
Since you are liable to repay the loan, any missed payment will reflect in the rating. It will take months or years of constant repayment time to repair the damage on the credit profile.
A bad credit score will have many consequences that include employment eligibility.
Many employers are checking the credit profile to find the fund management abilities of a candidate. They may not hire someone financially irresponsible with a history of default.
3. Available Credit Gets Reduced
The lenders can assume the guarantor loan as your liability to reduce the available credit. You may not get the required funds from banks for an important purpose.
Thus, you will face trouble with the approval for a heavy loan amount.
Even the credit card limits are affected if you are a guarantor for a heavy loan. Moreover, you will face more rejection if the loan has resulted in bad credit ratings.
You should contact the direct lenders for fast loans in Ireland because affordability is more important than credit profile.
4. Low Benefit for the Associated Risk
People are willing to take a risk if they get enough returns from it. The risk associated with guarantor loans may not result in any positive impact on your credit profile. You are taking a risk with no possible gain.
Though, you are helping your loved ones to get through financial trouble with a great gesture.
On the other hand, you will end up with the responsibility to repay the loan in case of a default. If you think objectively, the benefits are considerably low when compared to the risk associated with the whole process.
5. Not Everyone is Worth the Trouble
People feel the obligation to help their loved ones during tough times. It is understandable and reasonable to ignore the risk associated with the support.
However, not everyone in your social circle is worth the trouble of signing as a guarantor.
You should learn to say no to people if they come and ask for your help. It is okay to deny their request if they are not good with financial decisions and a serious risk of default is involved.
To sum up, lenders offer guarantor loans to people with an ineligible profile for a personal loan. It helps reduce the risk of default for them with a reliable entity responsible for the repayment.
Nevertheless, it is not the ideal situation for the borrower and guarantor because of the various risks and increased stress of repayment.