Tips & advice

What is guarantor car finance?

Find out what guarantor finance is and if you should get it.

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Guarantor car finance could be an option if you have a poor credit score or a limited credit history. If this is the case you might well struggle to be approved for traditional car finance deals. Using a guarantor is a solution to this because it increases your chances of securing finance on a car. 

A guarantor is a third-party who is responsible for the repayments on your car finance deal if you are unable to pay. This means that the lender has a backup plan if you can’t make the payments and gives the lender greater security making them more likely to lend. 

As with regular car finance you can apply for a Personal Contract Purchase (PCP) or Hire Purchase (HP) agreement with a guarantor. A guarantor PCP contract would have lower monthly payments as some of the cost is deferred until the end of the agreement where you would have to pay an optional final payment to keep the car. HP breaks up the total cost of the car, including interest, over the term and you would automatically own the vehicle at the end. 

When deciding which car finance option to go for, consider what monthly payments you can afford and whether you want to own your car at the end of the contract. If you opt for PCP you can return the car at the end of the agreement without any extra cost as long as you have stayed within the terms of the deal and the car has no damage. 

Should you get guarantor car finance? 

Guarantor finance could be a good option if you are a young driver and have little to no credit history. This type of finance should increase the likelihood of you being able to afford a better car and by making all your payments on time and completing the contract it would improve your credit rating. The main hurdle is finding someone who has a good credit history and is willing to be your guarantor, this is generally a family member or close friend.

The same applies if you have poor credit, this type of finance is a good way to build your credit score and improve your chances of being approved for finance in the future. Guarantor finance could also benefit you if you are self-employed, on a zero-hours contract or have irregular income because the addition of a guarantor would make lending to you less risky for the finance company. Alternatively, you might be able to get approved for a limited amount of finance and adding a guarantor could increase the amount a lender is willing to give you. 

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Should you be a guarantor? 

Becoming a guarantor on a car finance deal does come with risks so you should be aware of the implications of an agreement like this before going ahead. Firstly, only agree to be someone’s guarantor if you trust them and believe they will be able to make consistent repayments of the amount in the deal. Your role is to make these payments if the applicant can’t so you must also ensure that you yourself could make the payments in an emergency. 

It is essential you trust the applicant because the debt could become your responsibility and even if your relationship breaks down you will still have to pay. If both of you are unable to make payments then this will have an impact on your credit score, the car would be repossessed and you could both face County Court Judgments (CCJs). 

Once you are comfortable with the idea of being a guarantor there are certain requirements you have to meet to ensure you are eligible to act as one. You must be prepared to have your credit score checked to make sure you have a good credit rating and reliable credit history. Guarantors are more likely to be approved if you own a home or have lived in the same residence for a long period of time, this is a way to prove to the lender that you are able to keep up with payments. 

Some lenders will accept guarantors who are over 18 but for others the minimum age is 21 so check you are old enough for that particular lender before putting yourself forward. To be a guarantor you must not be directly financially connected to the applicant so if you are their spouse or business partner you would not be eligible. 

However, if you are not financially connected, becoming the applicant’s guarantor would link you financially and this could have a negative impact on your own credit rating. Once you agree to be a guarantor you remain in this role until the end of the agreement unless the finance is paid off in full before the end date. 

As with all finance agreements make sure you and the applicant understand all terms and conditions before signing the contract.

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