Unsecured loans like payday loans and guarantor loans are becoming popular due to the increasing cap rate. Many parents are sponsoring their kids to help them buy homes and vehicles. However, becoming a guarantor of your kid’s loan is not always a wise choice. You can secure your investment and ensure that the guarantee will not affect your credit score by following the given tips.
Guarantor Loan for First-Time Home Buyer
Guarantor loans can be ideally used for purchasing a home for the first time. In other types of home loans, the lenders lend only a specific amount of loan, which is usually equivalent to the amount of home equity. In unsecured loans, the borrowers can borrow money using payday loans. However, the amount of payday loan ranges from £70–£10,000. This is why the payday loan may not suffice the down payment of first-time home purchase.
The second option in unsecured loans is guarantor loans. Since there is no cap or limit to the guarantor loans, the borrowers can borrow even more than the home equity from lenders. This means that if X is the amount of home equity and Y is the amount of processing fee, possession, name transfer fee, and other charges then the borrowers can obtain a sum of X + Y. Simply put, a borrower can recover all kinds of expenses included in purchasing the first home with a guarantor loan.
Limit Your Risk
As there is no limit on the guarantor loan, many first-time borrowers end up getting more amount than what they actually require. This is the first step that leads to the failure of repayments. Young people, who borrow more than what they need or afford, either make the loan repayments throughout their lives or deny to make the repayments. When they deny, the responsibility of repaying the guarantor loan falls on the shoulders of the guarantor. Unfortunately, most of the young people take more money especially when they are aware of their parents’ savings. Make sure to limit your risk by evaluating the affordability of your child. It will also help your child learn about the necessities of lending.
Seek Legal Advice
A legal advice is beneficial in two ways. Firstly, it helps you to evaluate your options and risks. A legal advice is essential to understand the guarantor loan in a better way. The impact of guarantor loan could be larger than just an impact on your credit score. Sometimes, it may lead to expensive fines and even imprisonment if the lender takes the case to the court.
Secondly, some lenders require the acceptance that you have obtained legal advice regarding becoming the guarantor of your kid’s loan. This kind of acceptance makes it easier for you to understand the guarantor loan contract. The lenders also want to make sure that you are aware of the risks associated with becoming a guarantor in the guarantor loan. Remember that some lenders seek legal proceedings irrespective of their relationships with the borrower.
Meet the Advisor Separately
The relationship of parents and children is unique. Even if the kid does not pressurize you to become a guarantor, yet you may feel to obligatory help them in their difficult times. Many people become the guarantor of their kid’s loan to establish a legacy. If you feel any kind of such pressure or obligation then meet the legal advisor separately. The advisor will explain you the situation in your context and alternative options for helping your child.
Do you have savings to make the repayments? Are you planning to sell a property for making the repayments? Are you willing to use your retirement securities? You need to be honest with yourself and with your child. Financial options are all about real-time calculations. The financial decisions may be based on emotions but the financial dealings are based on mathematical calculations. You need to calculate the repayments and assess the risks. Remember that if you sign up as a guarantor without real-time options to make the repayments then such an act may put you and your child in legal problems.
Plan for the Worst
Your child has a good job. The spouse of your child is capable of making the repayments. What could be worst, you ask? The worst scenario may conclude as loss of job or even a divorce. Contrary to this, you may also need money to fulfil your own needs. Situations may change as emergencies are unpredictable. Plan for the worst scenario and prepare a backup. If you are considering to use your savings for making the repayments as a guarantor, then make sure that you have enough money for fulfilling your own needs.
Prepare an Exit Strategy
Many parents lend money to their kids for making the loan instalments. It mostly occurs when people become first-time home buyers. However, parents can only become the guarantors of their kids for a few years only. You need to withdraw after a few beginning years. Therefore, prepare an exit strategy that allows you to withdraw your money. This will save your child from legal complications. After the withdrawal, your child will make all repayments of the loan.
Many people can help their kids in buying homes and properties simply by gifting them money. These kinds of options are suitable for short-term only. When you will prepare your case for government medical programs for old people, these gifts will put you in a serious trouble. A guarantor loan is a suitable way to help your child in difficulty along with withdrawing your money without putting your old age benefits at stake. For further details about your possible options, get in touch with the experts at Quiddi Compare.