Guarantor loan lenders will run credit checks as part of their underwriting process because it allows the company to see the applicant’s repayment history for other similar products and get an idea of whether they are a good lending prospect. The credit checks show your credit rating which formulates a score on how well you have paid other forms of credit in the past such as car loans, personal loans, mortgages and credit cards. If you have not made your previous payments on time, you will likely have a low credit score but if you have repaid your bills on time, you will have a high credit score. Credit scores can be broken down into five categories; very poor (0 – 560), poor (561 – 720), fair (721 – 880), good (881 – 960) and excellent (961 – 999).
For a guarantor loan, a credit check is run for both parties: the borrower and the lender. It is usually carried out as a ‘quotation search’ so it won’t leave a footprint on your credit file and no one will be able to tell that you have applied for this type of loan as a borrower or guarantor.
Failing to repay will negatively impact your credit score
If the repayment is not successful, the lender will usually get in touch by phone or email to discuss repayment. But if no repayment is arranged, the information will be fed back to a credit reference agency such as Experian or Equifax informing them that payment did not go through. This may cause the credit scores of both parties to fall and make it harder to obtain other lines of credit in the future.
So is a guarantor loan good for my credit rating?
Yes, a guarantor loan can help improve your credit score provide that you repay the loan on time. This is one of the biggest positives of this type of loan as it allows a customer with previously bad credit to demonstrate their creditworthiness and improve their credit rating in the process. However, guarantor loans should not be used specifically for the reason of improving ones credit rating. There are other cheaper ways to improve your credit score that are discussed below:
Ways to improve your credit score
Joining the electoral roll – all you need to do is register your vote with your local authority. The way this helps your credit score is because it encourages people to vote and ultimately, if your address is registered with the government, a credit reference agency can find your details easily to run a credit check.
Limiting your search queries – making numerous applications for loans or credit cards will leave tracks on your credit file and make it seem to other lenders that you are desperate for money. A way to avoid this is to really do your homework and compare the different loan products on our website so that you can pick the right company based on your requirements.