Guarantor car finance is a common method for individuals with poor credit history or insufficient income to secure a car loan. In such arrangements, a guarantor co-signs the loan, guaranteeing that they will make the repayments should the primary borrower default. While this can facilitate car finance for many, it comes with a number of risks for both the borrower and the guarantor.
Understanding the concept
Before diving into the risks, it’s essential to understand the fundamental concept of guarantor car finance. Here, if a borrower defaults on payments, the lender will turn to the guarantor for repayment. The guarantor acts as a safety net for the lender, ensuring the loan is repaid one way or another.
Risks for the guarantor
1. Financial liability: The most prominent risk for the guarantor is the financial responsibility that comes with the agreement. If the primary borrower defaults, the guarantor is legally obliged to repay the outstanding amount. This can lead to unforeseen financial strain.
2. Credit score impact: If the borrower defaults and the guarantor is unable to fulfil the repayment, the guarantor’s credit score can be negatively impacted. This can hinder their ability to secure loans or credit in the future.
3. Loss of relationship: Money disputes can strain personal relationships. If the borrower fails to make repayments, it can create tension and potential rifts between the borrower and guarantor, especially if they are close friends or family members.
4. Legal implications: In extreme cases where the loan is not repaid, and the guarantor fails to fulfil their obligation, there may be legal consequences. Lenders can take court action to reclaim the owed amount, which can be stressful and costly for the guarantor.
🚗 More information: What every guarantor should know.
Risks for the borrower
1. Increased debt: If a borrower is already struggling with finances, adding more debt with a car finance agreement can exacerbate their financial situation. This can lead to a vicious cycle of borrowing.
2. Higher interest rates: Due to the perceived risk by lenders, guarantor car finance might come with higher interest rates compared to standard car finance agreements. Over the term of the loan, this can result in significantly higher repayments.
3. Emotional stress: Knowing that a loved one or friend is shouldering the responsibility of a guarantor can be emotionally taxing. The borrower might feel guilty or stressed about the potential risks they’ve imposed on the guarantor.
4. Strained relationships: As with the guarantor, there is a risk of harming the personal relationship between the borrower and guarantor. If disagreements or disputes arise due to loan repayments, it can cause a permanent rift.
While guarantor car finance can be a viable solution for those struggling to secure a car loan, the associated risks shouldn’t be overlooked. It’s essential for both the borrower and the guarantor to understand the implications fully and communicate openly about potential scenarios. If you’re considering this type of finance, seeking financial advice and carefully weighing the risks against the benefits is recommended.
🚗 Read more: Everything you need to know before getting guarantor finance.
