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If you’re finding it difficult to get a loan, perhaps because you have a poor or limited credit history, you might consider looking for loans with a guarantor.
A guarantor is someone who agrees to cover the repayments if you’re not able to – ‘guaranteeing’ the lender that the payments will still be made. This makes it less risky for the lender to lend you money.
However, you should think carefully about whether a guarantor loan is right for you. If you end up being unable to pay your loan, and your guarantor has to make payments on your behalf, it may harm your relationship with them.
How do guarantor loans work?
A guarantor loan puts another person on the loan agreement who must make the repayments if the main borrower defaults.
If you’re the borrower, then that person is your guarantor. If you can’t pay, your guarantor must make the repayments, plus any interest and charges.
The loan agreement is a legally binding contract for both the borrower and the guarantor. And if you miss a payment or default on the loan, it could negatively affect both your credit records – not just yours as the borrower.
Otherwise, guarantor loans work in the same way as other loans, with the debt being repaid in monthly instalments over an agreed time.
» COMPARE: Guarantor loans
Are guarantor loans for bad credit?
Guarantor loans are often targeted at people with bad credit or no credit history who may have trouble getting credit elsewhere. Guarantor lenders mitigate the risk of the debt going unpaid by asking borrowers to provide a guarantor with a good credit history.
But compared with some other types of loans, guarantor loans typically charge higher interest rates, well above those offered to borrowers with a good credit history. This means it’s important to consider an application for a guarantor loan carefully.
And if you’re thinking about borrowing money because you’re struggling with your finances, it may be better to seek free advice from a charity such as StepChange or Citizens Advice first.
Who can you ask to be a loan guarantor?
A loan guarantor should meet the age requirements, have a good credit history and be financially stable. Crucially, you should trust them and they should trust you. They may be a close friend, relative or even a close colleague. They often need to be homeowners, though some non-homeowner guarantor loans are available.
You should be comfortable discussing your finances with your guarantor. You can’t be financially linked with your guarantor, such as sharing a bank account. This means that partners are often not accepted.
» MORE: Who can be a guarantor for a loan?
How to apply for a guarantor loan
Once someone has agreed to be your guarantor, you will need to consider the following before applying for a guarantor loan:
- Look at the total cost. You should check how much the loan will cost you over the full term, including interest rates and charges. You can use a loan calculator to do this. However, be aware that you may not receive the advertised APR.
- Make sure the loan is affordable. It’s important to check before applying that you can comfortably make the repayments each month.
- Check that you and your guarantor are eligible. Read the loan requirements carefully before you apply to reduce your risk of refusal. Limiting the number of loan or credit applications you make over a short period can help protect your credit score.
- Prepare some basic information, such as proof of ID and your income. You and the guarantor will also be asked to provide personal and financial information, and the lender will carry out a credit check and affordability assessments on both of you.
Depending on the lender, and if it accepts your application, the money can be transferred to the guarantor initially. This can happen relatively quickly, sometimes within 24 hours, but it can depend on the lender and if you’ve provided the information it needs.
If this is the case the guarantor has a 14-day cooling-off period, during which time they can either transfer the money into your account or change their mind and return it to the lender.
You can compare guarantor loans through some price comparison websites or a broker’s website to find the loan that suits you, or you can go directly to a lender.
How much can I borrow with a guarantor loan?
You may be able to borrow as little as £500 with a guarantor loan, and lenders generally offer up to £10,000. But it depends on the lender, your financial circumstances and your guarantor’s financial credentials, such as their income and homeowner status.
Pros and cons of guarantor loans
It’s a good idea to weigh up the potential benefits and drawbacks of guarantor loans before going ahead. For the borrower, the pros and cons of a guarantor loan might be:
Pros
- It may offer access to a loan if you have a poor credit history and struggle to get a standard loan.
- If you meet repayments, it can help you build a credit history and improve your credit score over time.
- While guarantor loans have higher interest rates than standard personal loans, they are often lower than payday or short term loans. However, keep in mind that paying back a loan over a longer time frame will mean you pay more in interest overall.
Cons
- It can be an expensive way to borrow, with higher interest rates if you have a bad credit history and can’t get a loan yourself.
- Your guarantor must have a good credit history.
- It could put pressure on your relationship with the guarantor if you default on the loan – they could lose their home if it’s secured against the loan.
Complaints about guarantor loans
Guarantor loans have been in the news over the last few years, with borrowers and guarantors complaining that the loans were mis-sold.
These complaints include borrowers saying that affordability checks weren’t properly carried out, and guarantors claiming that they were forced into the agreement. In some cases, people have been given compensation after the lender was found to be at fault.
If you’re the borrower or guarantor on a loan and you think that the lender has acted irresponsibly, you may be able to get a guarantor loan refund.
Alternatives to guarantor loans
You may also want to look into other types of loans, such as bad credit loans or borrowing through credit unions, in case they suit you better or are more affordable.
If you can afford to wait a few months, you could consider improving your credit score before you apply for a loan. This may increase your chances of being offered lower rates of interest and getting a standard loan without a guarantor.
If you’re in debt, taking out a further loan could mean you get stuck in a cycle of debt, whereby you can’t afford to meet your repayments without borrowing more money.
There are free debt charities that can help you with things like budgeting, contacting your creditors and checking that you’re receiving all the benefits you’re entitled to. Charities include:
They could also help you apply for debt respite schemes such as the ‘Breathing Space’ scheme in England and Wales and the Debt Arrangement scheme in Scotland. There isn’t currently an equivalent scheme in Northern Ireland.
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