January 31, 2022
What Is an Unsecured Guarantor Loan And Should You Consider It?
Unsecured guarantor loans provide a path for borrowers with limited or poor credit histories. However, to qualify, you’ll need to find a guarantor to back the loan.
In this post, we’ll explain what these loans are, so you can fully understand this loan program.
What Is an Unsecured Loan?
To understand this type of financing, we need to explain what an unsecured loan is. Every loan, whether it be a personal loan or business loan, is either secured or unsecured. A secured loan is one that requires collateral, which can be just about anything of value, including:- Property
- Vehicles
- Equipment
What Does Guarantor Mean?
A guarantor is someone who supports a borrower and agrees to be financially liable in the event of nonpayment. This individual can be a partner, friend, or family member. Your business or someone else’s could also be considered a guarantor. Guarantors must meet the following criteria:- Have strong credit
- Financial stability
- Be at least 21 years old
Putting It All Together: How to Guarantor Loans Work?
Essentially, an unsecured loan is a type of loan that:- Isn’t secured by collateral.
- Has been guaranteed by someone with financial stability.
Advantages of Unsecured Guarantor Loans
1. Less Strict Prerequisites
Provided you have a guarantor with a high credit score, your credit history won’t be too important to the lender.2. Competitive Pricing
As mentioned, having a guaranteed loan reduces risk for the lender. In turn, the overall price of the loan will decrease. Compared to other financing options for borrowers with bad credit, unsecured guarantor loans are competitively priced.3. Larger Loan Amounts
The relatively lower risk profile of this type of loan helps borrowers qualify for larger loan amounts. In addition, the interest rates are often lower than other funding types, such as pa4. No Need for Collateral
Instead of requiring collateral, the lender holds the guarantor’s credit score as proof that the loan will be repaid. If you don’t have assets or don’t want to risk losing them, finding a guarantor may be your best option.Potential Downsides of Unsecured Guarantor Loans
1. Potential Negative Impacts on Your Relationship with the Guarantor
When someone guarantees a loan for you, your financial fate is intertwined. If you’re unable to pay off your loan, this can cause tension.2. Risks to the Guarantor
If the borrower doesn’t repay the loan, the guarantor must make up the difference. In addition, just as the default will affect your credit score, it will show up on the guarantor’s credit report. If they don’t want to risk their strong credit rating, being a guarantor may not be worth the risk.3. The Borrower Must Divulge Private Details
Depending on the guarantor, they may want to confirm that you can pay back the loan on-time. For many borrowers, divulging this private information (such as bank account and other financial details) can be uncomfortable.4. Interest Rates Can be High
These loans are more affordable than some financing options available to borrowers with low credit. However, that doesn’t mean they’re more affordable than traditional financing options, like a secured business loan.Funding Alternatives
These loans are typically best suited for borrowers with poor credit histories. Therefore, if you’re seeking this type of loan, assume that any alternatives should have lenient credit score requirements too. Financing alternatives include:- Merchant Cash Advances
- Invoice Factoring
- Equipment Financing
- Credit Cards