A guarantor loan is when somebody (typically a family member or close friend) agrees to pay off the debt if the person who took it out defaults on their payments.
They can be a useful option if you would struggle to be accepted for a loan on your own, for instance if you have a poor credit score or haven’t built one up yet.
Guarantor loans can either be secured or unsecured. If they’re secured, then the guarantor’s home could be at risk if you fall behind on payments.
They work like a normal personal loan, except both the person receiving the money and the guarantor will need to apply.
It’s then up to the lender to accept or reject the application based on whether you and the guarantor fulfil the eligibility criteria.
If it’s accepted, the details of the loan including the interest rate, monthly repayments and loan term will be agreed upon.
The person requiring the loan or the guarantor will then receive the lump sum. In some cases, the guarantor receives the loan and sends it on as a form of fraud prevention.
Once the loan term starts, monthly repayments will need to be paid. If they aren’t, the guarantor will have to cover the cost.
The advantages of taking out a guarantor loan include:
Of course, there are disadvantages to watch out for:
It’s easy to compare guarantor loans with us.
Just use our smart search tool to find the loans you have a higher probability of being accepted for. All you need to do is enter a few details about yourself and the type of loan you’re looking for.
It won’t affect your credit score and can help you avoid rejected applications.
If you find the right one for you, just hit ‘Apply’.
As you’re both applying for the loan, you’ll both need to meet the lender’s eligibility criteria.
The person requiring the loan will generally need to be:
Application criteria will differ between lenders, so it’s always important to check you meet the requirements before applying.
Guarantors will have a slightly different criteria:
Before you apply for a guarantor loan, think about what would happen if you fell behind on your repayments and your family member or friend had to step in and cover them. This could cause a huge amount of tension and may even irreparably damage your relationship if their home is at risk. Consider all the possibilities carefully before applying.
If you do decide it’s the right option, make sure you’re getting the best deal possible. Compare the different products available and read the terms and conditions.
A shorter loan term will ultimately save you money as you’ll pay less interest overall. Just make sure that you can afford the monthly repayments comfortably.
If you’re looking at guarantor loans, it usually means that your credit score isn’t great which will affect your ability to borrow. However, you may want to think about:
A credit card – It’s highly unlikely that you’ll be accepted for a new credit card with a 0% interest rate if you have a poor credit score, but if you already have a card with an affordable interest rate it may be worth using it instead of taking out a loan. Work out how much it would cost you to borrow on your credit card compared to a loan.
You may also want to investigate credit cards for those with bad credit ratings. They usually have lower credit limits and higher interest rates, but you’re more likely to be accepted for one even with a poor credit score and you won’t need to have a guarantor.
0% interest overdraft – For borrowing small amounts of money, you may want to look into an interest-free overdraft. If your current account doesn’t have one, then you could switch to one that does.
Saving up – It’s not an instant lump sum of cash but there won’t be any strings attached to it. Start by creating a budget to find out where you can cut costs each month and put the money somewhere you won’t be tempted to touch it, like a separate savings account.
Anyone can be a guarantor who meets the eligibility criteria of the lender. However, in most cases they’re a close family member, like a parent or guardian, or a friend. It may even be possible to have a partner as a guarantor on a loan, as long as you have separate bank accounts.
It’s vital that there’s trust between the applicant and guarantor, as the guarantor stands to lose a lot if repayments aren’t made.
If you don’t repay the loan, your guarantor is legally liable to pay it off.
The lender will require them to catch up on the payments or they might even take the payments from the guarantor’s bank account using a continuous payment authority (CPA). This may have been set up when the loan was approved.
If payments still aren’t made, the debt could be passed onto a collection agency or legal action could be taken against the guarantor. If it’s a secured loan, then the guarantor’s home may be at risk of repossession.
Both the applicant and guarantor’s credit score will be negatively affected by missed payments.
Yes, missed repayments will affect the credit rating of the applicant and guarantor.
Before you default on a payment, it’s important to get in touch with the loan provider if you think you might struggle.
They may be able to work with you and find a solution that eases the financial pressure. The last thing you want is for your guarantor to have to start covering your payments.
This will depend on the income of both you and the guarantor, but typically lenders offer guarantor loans of between £1,000 and £10,000.
The lender will want to make sure that you can afford your monthly repayments and that your guarantor would be able to cover the debt, if they needed to.
The guarantor will be subject to a credit check to make sure that they’re reliable with paying back debt. They’ll also need to pass an affordability check to make sure they can cover the loan amount, if required.
As well as that, they’ll need to fulfil the eligibility criteria, for example being over 21 and a UK resident. Their identity and housing will be checked as part of fraud prevention measures.
If it’s a secured loan, they’ll be required to own their own home.