A guarantor loan is an unsecured loan where a second person is responsible for paying off the debt if you can’t keep up with repayments.
If you can’t afford any repayments your guarantor will be liable for them and will have to pay. It works a bit like having a joint bank account - both your credit scores will be impacted.
Guarantor loans are an option if you’ve got a poor credit history or no credit history, and you’re struggling to get accepted for a standard personal loan.
Sometimes your guarantor needs to be a UK homeowner too, but there are non-homeowner loans available.
These kinds of loans might be secured against the property of the guarantor, so if you default on your repayments, you risk the guarantor’s property being repossessed.
You can’t be financially linked to your guarantor already, for example, if they're a partner that you share a bank account with, but they can be a friend or family member.
The interest rate on guarantor loans varies by lender but expect it to be higher than average. We checked Defaqto, and out of 15 guarantor loans, the representative APR ranged from 24.9% to 69.9%.
You’ve also got a limited choice, there aren’t that many options for guarantor loans on the market.
You’ll need to:
If you’re thinking about being someone’s guarantor, have an open and frank conversation about what they need the money for and ask for evidence that they can afford the repayments
Guarantor loans aren’t heavily regulated, even less so than payday loans. Both types have extremely high-interest rates, but the interest could be greater over a longer-term if you have a guarantor loan.
“Regulations mean 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’s money expert, Sally Jaques.
“Guarantor loans don’t have the same regulations, so there’ll be no cap on the interest amount you’ll pay over your loan term. That means that you could end up paying back way more than you originally borrowed and ending up in even more debt.”
Here are a few other options to consider:
If you’ve got a good reputation with them, you could be offered a loan tailored to your circumstances
These not-for-profit organisations can be more supportive and understanding than other lenders, but you need to be a member to qualify for a loan. Read more about credit unions
This is where you borrow money directly from another person, but only those with a squeaky clean credit history are offered the best deals. Read more about peer to peer lending
There are credit cards specifically for those with bad credit, so it’s worth taking a look to find the best solution for you
A family member, friend or work colleague may act as a guarantor, the only person who can’t is a partner or spouse who’s financially linked to you. They will need to be between 21 and 75 years old and have a good credit history.
Your guarantor will be financially responsible for making repayments on your behalf - as a guarantor that is what they’ve agreed to through the contract they’ve signed.
Provided all the relevant payments are made on time, your credit score won’t be affected. However if the debtor fails to make payments and the loan falls into arrears, it will be added to your credit file.
If you’re struggling with your repayments, speak to your lender first.
Alternatively, contact your local Citizens Advice Bureau, National Debtline or StepChange Debt Charity for free advice.
As of 17th October 2019.