Guarantor loans may be useful if you have a lower credit score or when a loan has been refused. Put simply, someone else (the guarantor) would make the repayments if you could not. But how is a guarantor loan treated in an IVA?
Jump to article contents:
- How guarantor loans work
- Guarantor loans in an IVA
- Considering a guarantor loan?
- What if you are the guarantor?
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How Guarantor Loans work
If lenders are refusing to approve a loan, you may be able to get a guarantor loan. This is easier to get because a guarantor is nominated who agrees to pay the repayments if you cannot. The risk for lenders is therefore reduced which increases your chances of getting approval.
The guarantor can be anyone, but often is a friend or family member. The guarantor must be able to pay your monthly repayments. If you cannot pay the lender can and will pursue them to recover the debt.
There are many companies offering these loans, but it is important to make sure it is right for you. Having a lower credit score partly protects you from borrowing money you cannot afford to repay. Guarantor loans can create problems if you can’t really afford the monthly repayments or have other debts to pay as well.
Guarantor loans that go wrong can create pressure and upset between families that could be avoided. This is the last thing that people facing un-affordable debt need.
Guarantor loans in an IVA
If you are considering using an IVA to solve your debt problem you need to understand that you will have to include all of your unsecured debts in the arrangement including any guarantor loans you have taken out.
You will be protected from your creditors in an IVA. Affordable payments are made towards all of your debts usually over a fixed period. Your creditors cannot pursue you for the debt during or after the IVA has finished, which brings great peace of mind.
You must understand that if you cannot pay then your guarantor will have to make the monthly payments for you. If they cannot pay the monthly payments, creditors can take enforcement action against them to retrieve the debt in full.
The creditor would never receive more than they are owed in total, but they have a better chance of recovering the debt. That is why they are willing to offer the loans in the first place.
Considering a Guarantor loan?
Any loan should only be taken if you know it is affordable. That means understanding your budget. After all your normal living expenses are paid, is there enough left to regularly pay the loan payment. If you are in doubt then take advice first!
There is a reason loans are declined. If your credit rating is low it may indicate that there is a larger debt problem to address. Any additional borrowing may actually make things far worse in the long term.
Remember if you do not make the payments, the money will automatically be taken from the guarantor’s account. There is nothing you can do to stop this. The responsibility for the debt legally passes to the guarantor whether they can afford it or not.
An IVA will protect you, but not your Guarantor. For people in debt Guarantor loans can be an expensive mistake. Not only are the interest rates high, but the personal fallout with the guarantor can be very stressful.
What if you are the Guarantor?
The advice here is simple. Only ever agree to being a Guarantor if you know you could make the monthly repayments yourself. Hopefully that will not happen, but you need to be prepared.
You should take the time to work with the person borrowing the money on their budget. Make sure you are satisfied that they understand their living expenses and can afford the monthly payments. You should only be called upon then if there is an unforeseen problem or emergency which means you are happy to help out.
The availability of debt advice and debt solutions now means that debtors are able to write off unaffordable debt relatively easily. If you are a guarantor for a debt that is put into an IVA you will not be protected. The creditors will pursue you for the monthly payments or the full amount.
As a Guarantor of a debt you are not protected by an IVA. If you cannot afford the payments you may also face enforcement proceedings. Encourage any potential debtors to take advice first!
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