Guarantor car finance is aimed at people who are struggling to be accepted for regular car finance schemes.
It’s especially popular with young people who have a ‘slim’ credit profile. Or in other words, those who haven’t had the chance to accrue much proof of responsible borrowing. Guarantor car finance can help people with bad credit get car finance too.
Before getting into an agreement there are two big questions to ask yourself.
Can you afford the monthly payment? And can you afford it every month?
There’s no point going through this arduous process if you’re stretching yourself too thinly. If you miss a payment, it’s your guarantor who has to stump it up.
But, if you can comfortably afford the payments, guarantor finance can be a canny way of building up your credit score while driving a new, or new-ish car.
How does guarantor car finance work?
As the name suggests, guarantor car finance allows you to add someone to an agreement to act as a guarantor. This person then becomes responsible for the repayment should you miss one.
The guarantor needs to have a good credit rating (or preferably an excellent one) as well as a proven record of financial stability. Plus, they need to be willing to stump up monthly repayments in case you can’t. Generally, people choose a close friend or family member.
In most cases applicants must be at least 18.
Guarantor car finance for young drivers
If you’ve stumbled on this article by Googling ‘guarantor car finance’ on your phone, chances are you’re a young person who hasn’t had the chance to build up much of a credit rating yet.
While not the be-all and end-all of finance, your credit rating affects how lenders see you. The worse your credit rating, the less likely a lender will be to lend you money.
Essentially, if you haven’t borrowed much money, your credit score won’t be brilliant. This is important because lower interest rates are awarded to people with high credit scores.
Using guarantor car finance can help improve your credit rating as making your monthly payments on time builds up your credit history and shows you’re reliable with money.
PCP and HP finance
Generally if you’re being rejected for car finance, a guarantor can help increase your loan options. Personal Contract Purchase (PCP) is the most widely used type of finance, and is available with a guarantor attached.
There’s a deposit, followed by a set of fixed monthly instalments, then you have a choice. If you want to buy the car, you’ll need to cough-up an optional final payment, sometimes referred to as a balloon payment.
If you don’t want to buy the car outright, you can simply return it. Sometimes the car’s value is higher than was initially forecasted, so you will have built up equity in the car. This can be put towards a deposit on another car.
With guarantor Hire Purchase (HP) your deposit and monthly payments cover the cost of the car entirely. This means that if you choose HP, you’re paying off the total value of the car each month, and will have bought it outright by the end of the contract. Monthly payments are higher than PCP, but unlike with PCP, you don’t need to make a final balloon payment to own the car because you’ve already paid for it.
Guarantor leasing options
Leasing is essentially like long-term car rental. There’s an initial payment, a set number of fixed monthly instalments, and that’s it. Once the contract is up the car is returned to the leasing company and you need to find another one.
This simplified form of finance is easy and usually offers the lowest monthly payments. The bad news is most leasing companies don’t accept guarantor finance agreements.
The good news is leasing companies are still willing to accept people with less than perfect credit ratings. If you haven’t had the chance to build up a credit rating, but at the same time, haven’t done things to negatively affect your credit ratings (e.g. missing payments on loans) then you still have a chance of being accepted for leasing without a guarantor.
Going for a cheaper lease deal improves your chances of being accepted on a lease deal.
>> Best car leasing deals for young drivers
What happens if you stop paying?
The Financial Conduct Authority (FCA), the authority for the financial markets in the UK, states that ‘many’ guarantors make at least one loan repayment, and that the proportion of guarantors making payments is growing.
As more people overstretch themselves with guarantor personal loans, ask yourself how much you can afford to spend, and stick to it.
If you stop paying your monthly figure, your lender will most likely contact you first to see if there’s been an error. If you don’t pay your bill, your guarantor will incur the cost.
If you think you might not be able to make a payment, contact your lender. They may be able to make a special arrangement.
Word of warning: if you miss payments, it will reduce your credit score. This exacerbates your problem of not having a good enough credit score to get credit in the first place.
If you continually miss payments, the car can be seized. You and your guarantor can be given a County Court Judgement (CCJ). If you don’t pay this off within 30 days of receiving the judgement, it will be added to your credit record, where it will stay for six years.
Bad credit car finance: can a guarantor help?
With a guarantor on board, lenders are more likely to lend you money because the risk level (e.g. the risk of the lender not being repaid) has been reduced.
This type of finance is designed for young people who don’t have much of a credit score, rather than people who have a poor credit rating because of previously not repaying credit.
>> How to lease a car with bad credit
Guarantor car finance without a credit check
The likelihood of any finance company offering you finance without a credit check is practically zero. But it’s important to remember that some lenders do a soft check, while others do a hard check.
A soft credit check is recorded in your credit history, but can’t be seen by lenders. So it doesn’t affect your credit score.
A hard credit check can affect your credit score because they are usually related to an actual credit application and lenders can see it.
It varies from company to company, so before you do it, it’s worth checking what type that company uses.
Further reading
>> Best cars for £100 per month
>> Best cars for £150 per month
>> Best cars for £200 per month
>> Best cars for £300 per month
>> Best cars for £400 per month
