Guide to guarantor loans
- If you miss your repayments your guarantor is liable to pay off the loan
- The interest tends to be much higher than on personal loans, but you may be able to borrow more than with other bad credit options
- You'll need to be over 18 and hold a UK bank account to be eligible; your guarantor must not be financially linked to you
- Consider alternatives to guarantor loans before committing
A guarantor loan is an unsecured loan where a second person is responsible for paying off the debt if the person who has taken out the loan misses their repayments.
This type of loan could be an option for those with little credit history or a poor credit rating, who struggle to get accepted for a loan product.
However, it's worth noting that you may end up paying more than the original borrowed sum in interest, on top of your monthly repayments.
Guarantor loan availability and interest
The annual percentage rate (APR) of interest will vary depending on the lender, the loan amount and the term period.
If you compare loans through Gocompare.com, you'll see that our best-buy table allows you to filter results so that you only see guarantor loans, or you can see them alongside other options such as personal, secured, car and/or peer-to-peer loans.
Bear in mind that guarantor loan choices may be limited. On 2 December, 2014, Gocompare.com checked 126 personal loans listed on the matrix of independent financial researcher Defaqto and found that just seven were guarantor loans.
The representative APRs on these products was relatively high, ranging from 14.2% to 62%.
You're almost certainly looking at a higher interest rate than you would be with a good credit product, but typically you'll be able to borrow more than with other bad credit loan options because of the guarantor element.
Guarantor loan criteria
For loan applicants
To take out a guarantor loan, you'll need to be over 18 years old and hold a UK bank account from which you can make the repayments.
You'll also need to demonstrate to the lender that you'd be able to afford the repayments, for example by showing that you have a regular salary.
To act as a guarantor for someone's loan, you must be over 21 with a good credit history (which will be checked) and a UK bank account. You'll usually have to also be a UK homeowner, although there are non-UK homeowner loans available. If the guarantor is a UK homeowner, it may mean that a larger sum can be borrowed.
Guarantor loans don't have a cap on the interest amount you'll pay over your loan term, which means that you could end up paying back way more than you originally borrowed
Matt Sanders, Gocompare.com
However, be aware that some loans will be secured against the property, so if you default on your payments there's a risk of the guarantor's property being repossessed.
Remember that you must not be financially linked to the person who has taken out the loan (a spouse with whom you already share financial products, for example) but they can be a family member or friend.
Becoming someone's guarantor isn't a decision that should be taken on lightly - you have to trust that they'll make their repayments because, if they default, you'll be the one who has to pay out.
It's a good idea to ask why they need the money and for evidence that they have the means to make their repayments each month. Also make sure that they have a plan in place and a date by which they expect to pay back the money.
Interest may exceed 100% of loan amount
"Due to the introduction of tougher regulations by the Financial Conduct Authority (FCA),† the amount to be paid back on payday loans is to be no more than an additional 100% of the original amount borrowed," said Gocompare.com's Matt Sanders.
"Guarantor loans don't have the same regulations applied to them, so there'll be no cap on the interest amount you'll pay over your loan term, which means that you could end up paying back way more than you originally borrowed and ending up in even more debt.
"But both types of loans have an extremely high interest rate and should be avoided where possible."
Guarantor loan term
This is the period over which you'll be paying back your loan. Guarantor loans usually have a term of between one and five years.
Guarantor loans and your credit rating
If the repayments are made on time and it's paid off within the term period, a guarantor loan could be a way of improving a poor credit rating or building up a non-existent one.
An income protection insurance product may be useful if you're taking out a guarantor loan.
This type of policy can cover your repayments if you're not able to make them due to accident, sickness or unemployment.
Of course, if you don't make your repayments, you'll be charged interest, which will get you even further into debt and further damage your credit history.
Make a soft search for a guarantor loan
If you're looking for a guarantor loan, try to use a smart search tool such as the one you'll find in Gocompare.com's loans comparison service.
This allows you to make what's known as a soft search, which will show the products you're likely to qualify for before you apply, meaning that there won't be an impact on your credit history.
If you fail to make your repayments, the responsibility for paying off the loan will fall to the guarantor.
If they're unable to make the payments, the lender can legally take you both to court.
Overpayments and early repayment
Just like with other loans, if you decide to pay off the balance early you could be charged an early repayment fee, which is often equivalent to one or two months' interest. However, not all loans have an early redemption charge, so always check the terms and conditions.
It's worth noting that some lenders will charge you for making overpayments as well. If you're in the financial position to pay more than your monthly payment requirements, make sure that you read the terms and conditions of the loan closely so you're aware how much the fees will be.
Bad credit alternatives to loans
Speak to your bank or building society
If you have an established reputation with your current financial provider it's possible that they could offer a deal tailored to your circumstances.
This may be more appropriate and attractive than the dedicated guarantor and bad credit options advertised to the wider market. If you don't speak to your current provider, you won't know.
Credit unions are community co-operatives owned by their members that can offer a real alternative to banks for those in financial difficulty, although you'll need to be a member to qualify for a loan.
Such institutions have a reputation for being more understanding and supportive of those in financial difficulties - because they're not-for-profit institutions their purpose is intended to be to serve their members.
Explore peer-to-peer lending
Peer-to-peer lending is worth looking into, but attractive deals are likely to require a good credit history.
If you have a poor financial history you're going to struggle to find the most attractive credit card deals, but there are dedicated cards for people with bad credit ratings.
Did you know...?
- StepChange Debt Charity, National Debtline and Citizens Advice Bureau can all offer free advice on handling debt
Unfortunately named 'bad credit cards' are likely to have low credit limits and high interest rates, but it's again worth looking at the options.
Payday loans (don't do it!)
Help and advice...
If you are considering irregular lending options, at all costs stay away from loan sharks. You can contact your local Citizens Advice Bureau, National Debtline or StepChange Debt Charity (formerly the Consumer Credit Counselling Service) for free advice.†
By Abbie Laughton-Coles