To get a loan approved with a bad credit score is never going to be easy no matter how many times you try. Some lenders may take advantage of the situation with high-interest rates. But your monthly budget might not agree with the instalments. People with a low credit score are not the favourite customers of the banks. However, they can still get a loan at standard rates with a guarantor.
Numerous loan agencies in Ireland offer guarantor loan to the borrower. In case you have some doubts over the impact of these loans on your credit score, this blog will try to clear them all.
What is a Guarantor Loan
Before discussing the impacts, let us discuss the guarantor loan. It is a type of loan that contains a third entity apart from lender and borrower, called “guarantor”. The guarantor, in this case, must have a good credit score and regular source of income. It is the duty of guarantor to pay the lender in case the borrower defaults on the obligations.
In many cases, the guarantor pledges his asset as an extra layer of surety for the lender. Also, the guarantor does not have a claim on the asset purchased with the loan amount by the borrower. It is the type of loan people consider when their credit score is on the opposing side.
Impact on Borrowers Credit Score
A guarantor loan will display like any other credit amount on the report. Timely payment will help your credit score with positive markers. While it is difficult to improve a bad credit score, a guarantor loan can certainly help. All you need to do is make timely repayment. You must stick to the commitment for a long duration for visible results in your credit ratings.
In case you are missing on the payment, your credit score is going to take a hit. Like any other loan, it will appear as a negative mark on the report. Too many debts already in addition to the new guarantor loan are also bad for your credit ratings. It makes you look dependent on the credits to make ends meet in front of loan agencies in Ireland.
Impact on the Guarantors Credit Score
There will be no effect on the credit rating of the guarantor as long as the borrower is making payment on time. The role of guarantor starts when the borrower doesn’t keep up with the payment. Then, the score of the borrower is at risk. If the guarantor has made the payment on time, the effect will be slightly positive. You might have to ultimately pay off the debt to keep your credit rating impact.
The credit score is affected negatively if the guarantor does not make the payment. Thus, if the borrower misses on a payment, the guarantor must make it to keep their credit rating intact. This type of loan doesn’t affect the ability to get a mortgage unless the guarantor is responsible for paying off the loan. In this situation, you must keep up with the payments to make your credit history look credible.
Therefore, the ability to get a mortgage is not at risk as long as the borrower is not defaulting any obligation.
Why Would I Become a Guarantor?
With the risk of negative impact on the credit rating, the question that comes to mind is why someone will become a guarantor? The answer is because your family or friends might need your help during distress. It is your moral obligation to support them during their financial crisis.
Apart from it, only positive is the credit rating increase when you make a payment instead of the borrower. However, this is something you might consider more of a negative than positive to the situation.
Loan agencies in Ireland will readily give you this type of loan if the guarantor is eligible for it. The borrower also has an opportunity to increase their credit rating. They should take good care of the loan repayment to make sure it doesn’t affect the credit rating of the guarantor. You can always avail automated deduction to make sure the payment is made on time. For the guarantor, there is hardly any positive other than helping your friend or family in need. The credit rating might improve for them but at the cost of financial help to the borrower.