Loans That Require Another Person

Loans With Other People Involved

We appreciate that it is not always easy to get access to the credit we need. With banks and mainstream lenders have a strict lending criteria in place, it can be hard to borrow amounts such as £5,000 or £10,000 to help fund lifestyle purchases such as a wedding, new car, education or consolidating your debts.

It is typically harder to obtain finance if you have a bad credit rating,  and this may not always be your fault. We have all fallen on hard times at some point in our life and with the expensive cost of living, bills, children, redundancy and more, it is hard to keep up with monthly repayments.

But just because you have bad credit does not mean that you are a bad person to lend to. In fact, your difficult period might be over and now you are looking to start fresh and get back on your feet.

Well, this is where a loan with another person involved can help. The way a guarantor loan works is that you are able to leverage the creditworthiness of your guarantor to get the loan you need. Therefore, if you have a guarantor with a good credit rating, employment, income and ideally a homeowner status – you will maximise your chances of getting a loan with our selected providers.

It works on the premise of ‘well if this person with a good credit score and strong residential status is willing to back you up, well we can too.’ This type of finance gives the lenders peace of mind knowing that you cannot fulfil the requirements of your loan, your guarantor with a sound financial history will be able to step in and recover repayments for you.

For the guarantor, they get the satisfaction knowing that they have helped out a close friend or relative get the funds they require. Best of all, guarantor lending allows the individual to demonstrate and improve their creditworthiness. By the main borrower repaying their loan on time, the information is passed onto the credit reference agencies that the lenders work with (Equifax, CallCredit and Experian) and if they continue to repay on time for several months and years, this will cause their credit rating to improve. This is provided that they also continue to make payments on time elsewhere.

Once the individual has a better credit record, they will be more likely to access finance in the form of loans, mortgages and credit cards in the future and at lower rates.

Which People Can I Get Involved In My Loan?

The ideal people to have involved in your loan are as follows:

• parents
• spouses
• siblings
• close friends
• close relatives

You want your guarantor to be someone that you are close to and can trust – and also speak openly about your finances with. After all, there needs to be this conversation about how much debt you have, how much disposable income is available, whether you can make repayments and if the guarantor will eventually have to step in.

Importantly, you need someone to be your guarantor who you are still going to be in touch with for several years. Since a loan duration can be up to 5 or 7 years, will you still be talking with them? Perhaps you won’t if it is a work colleague or friend, but family member is certainly more likely to be in communication in the coming years.

Furthermore, you need to pick someone who you do not have a joint account with, like a spouse or sibling – as the lender may deem this too close to home and question whether they are really your guarantor and who the debt is really for. For more information, read our guide on who can be your guarantor.

Other Loans Which Involve Other People

Guarantor loans are not the only ones which involve other people – however if you have someone you know and want to get them involved, this is the type of loan that could suit you, especially if you have bad credit. See other examples below:

Peer to Peer Loans

This is where you use a lender like Zopa, Ratesetter or ThinCats who act as a middleman between you the borrower and another person (a lender or investor).

You are applying for a peer to peer loan ranging from £1,000 to £25,000 and rather than borrowing it from a lender, the money actually comes from another individual in the UK who is lending it to you but hoping to earn some interest on your loan. They essentially see it as an investment and their return is based on whether they lend to someone with good credit (3.3% return) or take on more risk and lend to someone with bad credit and get a much higher return (around 9-10%).

The role of the lender like Zopa is to match the best borrowers and the best investors, whilst also carrying out affordability checks and creating a diversified portfolio so the main investor maximises their return and minimises their losses.

Borrowing From Family and Friends

One of the oldest and most traditional forms of borrowing is simply obtaining money from your family and friends. This can include small purchases as the pub, 5 a side football, restaurant or bigger purchases like a car, flat or home (which is usually with help from the bank of mum and dad).

The benefits include:

• Usually no interest
• No impact to your credit score
• No debt collectors, bailiffs or court orders

The benefits of borrowing from family and friends is that the terms are quite loose – there aren’t going to be bailiffs or debt collectors knocking at your door and whether you repay or not won’t affect your credit score.

Borrowing in social circles usually does not involve paying interest or late fees, it is assumed that you are going to be paying them what they lent you at your next early convenience. It is not surprising that this type of lending is worth over £20 billion in the UK ever year.

However, the MoneyAdviceService says that borrowing amongst family should be dealt with sensibly as it can lead to falling outs between family members. They explain the role of a basic contract and having some basic terms in an agreement in order to minimise any miscommunication.