Last updated May 21, 2021
If you have a poor credit rating or are a young driver who hasn’t had the chance to build up your credit score, you may be considering guarantor car finance as an option for buying a car. A guarantor is somebody who has a better credit rating and will be responsible for ensuring you pay your repayments. Ultimately, this means the guarantor will need to trust you to make your repayments or the debt will be passed onto them.
In this article we will explain how guarantor finance works, the benefits and drawbacks of using a guarantor, who can be your guarantor and the alternative finance options when buying a car.
When applying for car finance, the lender is likely to run a number of checks on whether you can afford to repay the balance and that you’re responsible with credit. If the finance company finds that you have a poor credit rating, you may be refused finance. There are many reasons that can result in you being refused finance, such as not having a reliable income, having previously defaulted on repayments, or simply not having much credit history due to your age.
If you have been refused finance due to having a poor credit rating, you may be able to obtain finance with the help of a guarantor. Typically, this would be in the form of a loan rather than Personal Contract Purchase or Hire Purchase agreements.
To apply, you will need to have somebody with a good credit rating to guarantee the amount of the loan. In the event that you miss a payment or default on the loan, the guarantor will then be responsible for either making the missed payment or settling the outstanding amount. It is important that the guarantor is aware that they’re taking on the financial responsibility for the loan and can adequately pay the balance should the borrower fail to do so.
In most cases, the guarantor will be a family member or friend of the person borrowing the money. As a general rule of thumb, partners and other people who are connected to the borrower financially won’t be able to act as a guarantor, although this is ultimately decided by the lender.
To be a guarantor you have to be over the age of 18, with some lenders only allowing people over the age of 21 to act as the guarantor. The person will need to demonstrate that they can afford the repayments should the borrower be unable to, have a good credit rating, and be able to provide evidence of making timely repayments. Some lenders may also require additional assurances for acceptance, such as the guarantor owning their home.
If you are considering becoming a guarantor for somebody, you should consider whether you can trust the person to make all repayments on time. You must also ensure that you are in a financial position to comfortably pay the debt if the borrower is unable to do so.
The main benefit of using a guarantor to finance a car is that without them you may be unable to acquire any finance. For example, if you are a young driver who hasn’t had the chance to build up your credit rating, you may not be approved for finance on your own, but having a guarantor may make it possible to lend the money.
Some people may be able to get accepted for car finance, but only for a small amount. In these cases, the borrower may be able to gain access to more money with the assurance of a guarantor, which can allow them to purchase a newer or more desirable car. However, it is important that you don’t borrow more than you can afford and that all borrowing is carefully considered before signing an agreement.
Finally, if you have a poor credit rating, making regular repayments on-time can help improve your credit score in the future, which may give the borrower access to better interest rates and improve trust with lenders in the long term.
One of the main drawbacks of using a guarantor is that the borrower will need to find somebody who is willing to take a risk and guarantee they’ll make all repayments. If you are a person with poor credit and a history of missing repayments, there may be too much risk involved for somebody to guarantee the loan.
Furthermore, if both the borrower and guarantor can’t afford to make the repayments, the loan will default and the credit ratings of both people could suffer. This can impact both parties' ability to borrow money in the future. As a guarantor, you may also consider how strong your relationship is with the borrower, as this could be tested if they are unable to make repayments and you become responsible for the debt.
If you have poor credit, there are still alternatives for buying a car. Firstly, you could lower your expectations and look at financing a car with a lower price - you could be being rejected for a loan due to not meeting the affordability requirements. Secondly, you may consider taking out car finance that is designed for people with bad credit, however, you will need to carefully analyse the interest rates as these may be high.
On the other hand, instead of using a guarantor or paying a higher-than-average interest rate due to having a poor credit rating, you could build up your credit score before applying to finance a car. If you have a better credit rating, you are more likely to be trusted by lenders and may be eligible for lower interest finance. This will mean you will pay back less over the term of the loan.
Finally, you could always try to save money and buy a car outright. Whilst this may seem unattainable to some, you may be able to put aside some money each month and then not have to worry about paying monthly repayments. If you have a car that you’re looking to sell, you can sell to us in under an hour; simply get a free online valuation in less than 60 seconds and sell your car at one of our 400+ UK branches.