Lenders view bad credit as an indication of financial irresponsibility. Having a poor credit score, or evidence on ones credit report of a previous repossession, bankruptcy, court judgment or default, all point to a high risk customer who may not be reliable if granted further credit. However lenders will often consider applicants with bad credit for a guaranteed personal loan if a co-signer with excellent credit is willing to stand as guarantor for the loan.
The concept of guaranteed loans is not only applicable to personal loans. The Federal Housing Association guarantees mortgage loans which are issued by third party lenders, and businesses can obtain guaranteed loans with the backing of the Small Business Association. Guaranteed loans are standard in the area of private student loans where the applicant may have no established credit record of their own due to their age.
To obtain a guaranteed personal loan with either bad or un-established credit, the applicant will need to have a willing guarantor to co-sign the loan. Most often a family member is called upon to stand as guarantor, and will need to have excellent credit. The loan application is jointly signed by both parties though oftentimes the guarantor used has little understanding of the implications. By guaranteeing a third party loan the co-signer effectively promises to be responsible for the loan repayments if the borrower defaults.
Default rates are very high on guaranteed personal loans, not surprisingly as the borrower was perceived as high risk by lenders who required a third party guarantee before issuing the loan. Borrowers in turn often underestimate the impact that their own late or non payments will have on the person who guaranteed the loan.
If a guarantor fails to meet the loan payments if the named borrower fails to do so, their own credit score will be negatively affected. Signing for a third party immediately reduces the credit to debt ratio of the co-signer, potentially limiting their ability to obtain further loans or credit in their own name. Lenders are entitled to pursue a co-signer for any delinquent payments and are often more likely to pursue a co-signer with good credit than a borrower with bad credit.
Unless a person is willing and able to pay the loan on behalf of the borrower if the borrower defaults, then standing as a guarantor is a risk not worth taking. Even is the borrower declares bankruptcy the guarantor will still be liable for the loan debt.
Taking a guaranteed personal loan is one way to improve bad credit, or to establish credit, if the loan repayments are made in a timely fashion. It is however a lot to ask of someone else to stand as guarantor. Improving ones credit before applying for a personal loan is a more sensible course of action.