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Guarantor Loans

Should you be a Guarantor on a Loan for your Grandchild?

As a grandparent it is likely that you will feel a responsibility not only for your children but also for your grandchildren. It can be good to feel that you can help them out when they need it. It could be that physically you are not so good as you have been in the past but that you can help them in other ways such as financially. You might have money that you can give them or you may not have too much and want to keep it in case you need care but feel that perhaps you could help by being a guarantor on a loan. This is something which you may want to look into more before you do.

What is a guarantor?

A guarantor is someone that will make payments if a person is not able to. This can be for a loan, but other things too such as rent. It adds a layer of security for the lender as they know that they will get their payments, even if it means that they will have to ask someone else. Lenders will normally only need a guarantor if someone has a poor credit record. This could be due to them falling behind with loan payments in the past or it could be because they have never had any bills in their name or borrowed before so lenders have nothing to go on with regards to their creditworthiness. Unfortunately having a guarantor may not make loans any cheaper but it will make them more available to those who may otherwise have not been able to borrow any money.

How can a guarantor loan help someone else?

So this means that if a person cannot get a loan themselves due to having a poor credit rating then someone who does have a good credit rating can act as their guarantor and allow them to get a loan. Usually a person would only help someone that they knew well, such as a family member. They would want to trust them and know that they will try their hardest to pay the loan themselves and hope that they will not be called upon to pay anything. This is why it is often a parent of grandparent that is asked to act as a guarantor. They will usually be close to their child or grandchild and be happy to help them out in this way if they can.

Other considerations

It is worth noting that the guarantor will need to have a good credit rating themselves. This may not be the case for all parents and grandparents, particularly if they are retired or out of work or have unpaid loans themselves. . They will also need to have the money available to be able to cover all of the loan repayments should they be asked to. Although the chances of them having to make every repayment are low, it is wise for them to be prepared for this just in case as then they will know that they can afford it.

If you have multiple grandchildren then it is worth thinking about whether you could help them all out in the same way. If you cannot then you may find that there is jealousy between them because you have helped one and not the other. This is not nice in a family. It may be that only one grandchild has asked you, but that does not mean that the others will not feel left out somehow. This will particularly be the case if you end up having to cover the cost of some repayments as you will effectively be giving one grandchild money and not the others.

It may be that you would expect your grandchild to repay any money that you have to pay for them. If this is the case, make sure that you make it clear form the start and even have it written down so that you are both sure on the terms. Think about when you expect them to pay it back as well, whether you would want it as soon as possible or would be prepared to wait until the loan is paid off first or whether you might just distract it from any money, they will inherit form you. It can be complex and so you need to think it through or else you may end up falling out because you had different expectations to them.

It is hard to say whether someone should be a guarantor to their grandchild. It will very depend on their own persona circumstance. It will depend on if they have a good credit record and can afford to, to start with. But they also need to consider the rest of family and how they may feel and whether the arrangement might affect their family relationships with that grandchild as well as any other family members.

Credit Cards

Should a Credit Card be Considered to be a Loan?

Many of us have a credit card and probably use it to do a lot of our shopping. It is easy to use one in exactly the same way as a debit card and not really think of it as a loan. In some ways it is not the same, but there are similarities and it really depends on how you use the card. It is worth understanding more about how it works so that you are more aware of any costs of the card that you might have to pay.

How the Card Works

A credit card allows you to make purchases without paying or them immediately. So you can use them instead of cash in a shop and then you will get a bill at the same time each month which will list all of your purchases. You will then get the option to repay everything that you spend and not pay any interest or charges or to repay a minimum amount where you will have to pay interest on the remaining balance and then can repay at your leisure. You can also pay any amount in between these two although the statement does not normally make this so clear. The costs of the card will depend on which card you choose as they do vary between credit card issuers.

Repayment Options

So as you can see, you can decide whether to pay interest and repay the money over a longer time and this is a form of borrowing. Or you can repay the whole balance and pay no interest and this is a form of interest free credit. This can therefore be classed as a form of lending and therefore a loan, however it is less controlled. With a conventional loan you will be expected to repay a certain amount each month until the whole of the loan and its costs are repaid. However, with a credit card you can choose any amount above the minimum to repay. In a way this gives you a freedom to plan your repayments to make them affordable for you and you have the flexibility of paying more off when you can afford it and less when you cannot. However, many people just pay off the minimum and do not think about paying off the full balance. This means that they take a very long time to repay what they owe and they pay a lot of interest. It is also hard to see the interest building up and how much you are paying for the loan because you pay off the interest in the minimum payment. If you added up all of those months of interest then you would be able to calculate how much the loan costs and this might motivate you to repaying it more quickly.

Repaying also takes self-discipline. If we use our money to repay the credit card then we will have less to spend on other things. It can feel like it is a great way that we can get more things and it is so important to think about the cost of doing this and whether you would still want those things if you knew how much they would end up costing you.

Is it a Loan?

So if you repay the credit card in full each month then although you get some interest free credit, it is not really like a loan as you pay nothing for the privilege. However, if you do not pay everything off each month, then you are treating the card like a loan. You will be paying interest on it as well.

It can be important to think of the card as a loan because it could help you to treat it more seriously. You should be considering the costs of using it as well as the convenience. Often a loan can feel big and be scary in some ways because of the amount of time it might take to repay and the cost of it. Although being worried and stressed is never a good thing, we do need to see the credit card as being as important as the loan though. We need to make sure that we are always aware of how much it is costing is and thinking about how we can repay it so that we are not paying more in fees than necessary.

For some people the fact that there is not an enforced repayment amount each month which will lead to the loan eventually being all repaid means that it feels different and lasts a lot longer than a conventional loan. It can feel like it is easier to manage and gives you more flexibility but there is also a risk that you will have it for much longer and therefore end up paying significantly more money for it. The interest rates tend to be higher than with a conventional loan as well, which adds to the cost even more.