Man in a suit holding out a sign saying No to indicate he wants to avoid guarantor loans.

Five Reasons to Avoid Guarantor Loans

A guarantor loan is a type of loan where the borrower has a guarantor agree to pay the loan if you cannot. While these types of loans are a useful tool for those with a poor credit history or a young person with no credit history, they aren't always a good idea. Here are five reasons to not sign for a guarantor loan.

  1. They put relationships at risk.

    Whoever agrees to be a guarantor for your loan is responsible for the payments if you cannot make them. If this is a family member or friend, as is usually the case, you risk damaging this relationship altogether. It is far better to save up or obtain money another way than to put a friend or relative at risk. Working a second job or settling for what you can afford may be better choices in the long run.

  2. They can be more than you can financially handle.

    Guarantor loans are typically available in larger loan amounts and this often cause problems for financially irresponsible individuals. It is easy to qualify for more than you can afford because you have the credit of the guarantor to rely on. This can give the borrower a false sense of security and thus spell disaster for the guarantor.

  3. They take away your independence.

    A guarantor loan makes the recipient depend on the person who guaranteed the loan. If you prefer being independent, then you might reconsider getting a guarantor loan and find a different way to obtain the money you need.

  4. They are serious financial commitments.

    Many people take on this type of loan to pay off bills, such as credit cards, or for other frivolous purposes. A guarantor loan is a serious financial commitment and should only be chosen for serious situations, such as paying off a medical bill or paying your mortgage.

  5. You could lose your property.

    If you default on a loan, you could lose your property. If you use the loan for a mortgage, you risk losing your house to the guarantor or the bank. You might also be required to sell off other assets, such as your vehicle, to cover the loan.

Overall, a guarantor loan is not a financial instrument you want to take on lightly. Instead of solving your financial problems and giving you some wiggle room, it can cause further financial difficulties. If you have any doubts about your ability to repay a guarantor loan, opt out and look into other, less risky options.

Last Updated: April 02, 2015