Guarantor car finance for young people explained

  • Gives young people a helping hand
  • If you don't pay your bill, your guarantor will
  • Not applicable with some types of finance 

Car finance helps spread the cost of a new or nearly new car into affordable monthly payments. Guarantor car finance is aimed specifically at people struggling to get car finance.

It's especially aimed at young people who haven't had the chance to build much of a credit profile, as well as those with bad credit.

The allure of a shiny new Mercedes A-Class or Fiat 500 is strong, but before applying for guarantor car finance, you should ask yourself two big questions.

Can you afford the monthly payment, and can you afford it month after month? There's no point going through the process if you'll only be able to realistically afford the payments every other month.

If you can comfortably and reliably afford the monthly payments, guarantor car finance can be a canny way to add to your credit score while driving a new or newish car.

Guarantor Car Finance

How does guarantor car finance work?

As the name suggests, guarantor car finance allows you to add someone to an agreement to act as a guarantor. This person then becomes responsible for the repayment should you miss one.

The guarantor needs to have a good credit rating (or an excellent one) as well as a proven record of financial stability. Plus, they need to be willing to stump up monthly repayments in case you can't. Generally, people choose a close friend of family member.

Guarantor car finance for young drivers

If you've stumbled on this article by Googling 'guarantor car finance' on your phone, chances are you're a young person who hasn't had the chance to build up much of a credit rating yet.

While not the be all and end all of finance, your credit rating affects how lenders see you. The worse your credit rating, the less likely a lender will be to lend you money.

Essentially, if you haven't borrowed much money, your credit score won't be brilliant. This is important because lower interest rates are awarded to people with high credit scores.

Using guarantor car finance can help improve your credit rating as making your monthly payments on time builds up your credit history and shows you're reliable with money.

In most cases applicants must be at least 18.

Guarantor PCP and HP finance

Generally if you're being rejected for car finance, a guarantor can help increase your loan options. Personal Contract Purchase (PCP) is the most widely used type of finance, and is available with a guarantor attached.

There's a deposit, followed by a set of fixed monthly instalments, then you have a choice. If you want to buy the car, you'll need to cough-up an optional final payment, sometimes referred to as a balloon payment.

If you don't want to buy the car outright, you can simply return it. Sometimes the car's value is higher than was initially forecasted, so you will have built up equity in the car. This can be put towards a deposit on another car.

Guarantor car finance in dealership

With guarantor Hire Purchase (HP) your deposit and monthly payments cover the cost of the car entirely. This means that if you choose HP, you're paying off the total value of the car each month, and will have bought it outright by the end of the contract. Monthly payments are higher than PCP, but unlike with PCP, you don't need to make a final balloon payment to own the car because you've already paid for it.

Guarantor car finance options: leasing

Leasing is essentially long-term car rental. There's an initial payment, a set number of fixed monthly instalments, and that's it. Once the contract is up the car is returned to the leasing company and you need to find another one.

This simplified form of finance is easy and usually offers the lowest monthly payments. The bad news is most leasing companies don't accept guarantor finance agreements.

The good news is leasing companies are still willing to accept people with less than perfect credit ratings. If you haven't had the chance to build up a credit rating, but at the same time, haven't done things to negatively affect your credit ratings (e.g. missing payments on loans) then you still have a chance of being accepted for leasing without a guarantor.

>> Search for car leasing deals
>> Best car leasing deals for young drivers

What happens if you stop paying guarantor finance?

The Financial Conduct Authority (FCA), the authority for the financial markets in the UK, states that 'many' guarantors make at least one loan repayment, and that the proportion of guarantors making payments is growing.

As more people overstretch themselves with guarantor personal loans, ask yourself how much you can afford to spend, and stick to it.

If you stop paying your monthly figure, your lender will most likely contact you first to see if there's been an error. If you don't pay your bill, your guarantor will incur the cost.

If you think you might not be able to make a payment, contact your lender. They may be able to make a special arrangement.

Word of warning: if you miss payments, it will reduce your credit score. This exacerbates your problem of not having a good enough credit score to get credit in the first place.

If you continually miss payments, the car can be seized. You and your guarantor can be given a County Court Judgement (CCJ). If you don't pay this off within 30 days of receiving the judgment, it will be added to your credit record, where it will stay for six years.

Bad credit car finance: can a guarantor help?

With a guarantor on board, lenders are more likely to lend you money because the risk level (e.g. the risk of the lender not being repaid) has been reduced.

This type of finance is designed for young people who don't have much of a credit score, rather than people who have a poor credit rating because of previously not repaying credit.

>> Car finance for bad credit
>> How to lease a car with bad credit

Guarantor car finance: no credit check

The likelihood of any finance company offering you finance without a credit check is practically zero.

But it's important to remember that some lenders do a soft check, while others do a hard check.

A soft credit check is recorded in your credit history, but can't be seen by lenders. So it doesn't affect your credit score.

A hard credit check can affect your credit score because they are usually related to an actual credit application and lenders can see it.

It varies from company to company, so before you do it, it's worth checking what type that company uses.

Further reading

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