UK Car Lending

What is guarantor car financing?

Guarantor auto financing could be an option if you have a poor credit rating or a limited credit history. If so, you might struggle to get approved for traditional auto finance deals. Using a guarantor is a solution to this as it increases your chances of getting financing for a car.

A guarantor is a third party who is responsible for repayments from your auto finance contract if you are unable to pay. This means the lender has a back-up plan if you can’t make the payments and gives the lender greater security, making them more likely to lend.

As with regular auto financing, you can apply for a Personal Purchase Agreement (PCP) or a Hire Purchase Agreement (HP) with a guarantor. A guarantor PCP contract would have lower monthly payments because part of the cost is deferred until the end of the agreement where you will have to pay an optional final payment to keep the car. HP breaks down the total cost of the car, including interest, over time and you’ll automatically own the vehicle at the end.

When deciding which car financing option to choose, think about the monthly payments you can afford and whether you want to own your car at the end of the term. If you opt for PCP, you can return the car at the end of the contract without any additional costs as long as you have respected the terms of the transaction and the car has not suffered any damage.

Should You Get Guarantor Car Financing?

Guarantor financing might be a good option if you are a young driver and have little or no credit history. This type of financing should increase the likelihood that you can afford a better car and by making all your payments on time and fulfilling the contract, it would improve your credit rating. The main hurdle is finding someone who has a good credit history and is willing to be your guarantor, usually a family member or close friend.

The same goes if you have poor credit, this type of financing is a good way to build your credit score and improve your chances of being approved for financing in the future. Guarantor financing could also benefit you if you are self-employed, on a zero hour contract, or have irregular income, as adding a guarantor would make the loan less risky for the finance company. Alternatively, you might be able to get approved for a limited amount of financing and adding a guarantor might increase the amount a lender is willing to give you.

Do you have to be a guarantor?

Becoming a guarantor for a car finance deal comes with risks, so you should be aware of the implications of a deal like this before moving forward. First, only agree to guarantor someone if you trust them and believe they will be able to make regular repayments of the transaction amount. Your role is to make these payments if the applicant cannot, so you should also ensure that you could make the payments yourself in an emergency.

It is essential that you trust the applicant because the debt could become your responsibility and even if your relationship breaks down, you will still have to pay. If both of you are unable to make payments, it will impact your credit score, the car will be repossessed and you could both face County Court Judgments (CCJs).

Once you are comfortable with the idea of ​​being a guarantor, there are certain requirements you must meet to ensure that you are eligible to act as one. You should be prepared to have your credit score checked to ensure you have a good credit score and a reliable credit history. Guarantors are more likely to be approved if you own a home or have lived in the same residence for a long time, it’s a way to prove to the lender that you are able to meet the payments.

Some lenders accept guarantors who are over 18 but for others the minimum age is 21 so check that you are old enough for that particular lender before applying. To be a guarantor, you must not be directly financially related to the applicant, so if you are their spouse or business partner, you would not be eligible.

However, if you are not financially connected, becoming the applicant’s guarantor would bind you financially and it could negatively impact your own credit rating. Once you agree to be a guarantor, you remain in that role until the end of the agreement, unless the funding is repaid in full by the end date.

As with all funding agreements, make sure you and the applicant understand all terms and conditions before signing the contract.