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Guarantor loans are a type of personal loan typically used by people with a bad credit history who find getting other types of loans (or credit) difficult.
The key feature of a guarantor loan is that the person with bad credit needs someone to agree to pay their loan if they are unable to.
For borrowers with a poor credit history, guarantor loans offer an alternative way to get access to cash. There are increasing numbers available now, offering more choices when you compare costs and charges to find the best guarantor loan for your circumstances.
If you have a bad credit history and you know someone who is willing to act as a guarantor this type of loan could be suitable if you need to borrow from about £1,000 to £10,000.
You will need to supply the details of your guarantor when you apply for the loan. They will have to agree to repay your guarantor loan if you can’t. Because loans with a guarantor reduce the risk for the lender, they are able to offer you lower interest rates than you could obtain elsewhere, or even a loan at all where in other cases you might have been rejected.
Your guarantor will only be asked to make payments as a last resort if you miss instalments. Being a guarantor is a serious financial commitment, so both parties should be aware of what they are doing, and be comfortable with the arrangement.
A guarantor is usually a close friend or family member who trusts you to keep up with your repayments, but it can be anyone. Relatives of those with bad credit can act as a guarantor but you cannot use anyone who is financially linked to you, such as a husband or wife.
Typically, guarantors must be at least 21 years old with a good credit history, and preferably be a homeowner. Lenders will carry out a credit check on the guarantor to confirm they have a good credit score, and can afford the repayments of the loan if the bad credit borrower can’t. A guarantor will need to provide identification, proof of address, bank statements and other details.
Lenders to borrowers with bad credit prefer a guarantor who is a UK homeowner. If the loan is secured, a lender will check that they have enough equity in their home to cover the value of your loan.
Guarantor loans are targeted at those who have a bad credit score, for example a history of missing repayments or no previous credit history, and who are likely to be turned down by mainstream lenders. This is why they are also known as bad credit guarantor loans.
Having a guarantor who will vouch for your ability to repay the loan – and agree to pay the money back if you don’t – can help you get approved for a loan.
Guarantor loans are still very expensive compared to standard personal loans or credit cards, with typical APRs, or annual percentage rates of up to 50%.
The reason they have become more widely used is that it makes it possible for people with bad credit to be approved for a loan. And with so many lenders offering guarantor loans, it gives borrowers more options to compare loans, and find a low interest guarantor loan.
Borrowers with a bad credit history can use a guarantor loan to access cash they may otherwise struggle to borrow. Repaying a guarantor loan will not be as cheap as other loans. However, repaying the loan instalments can help rebuild your credit score, giving you access to cheap loan rates in the future.
Rebuilding your financial history from a bad credit score into a good credit rating will make it more likely you'll be accepted for mainstream unsecured loans and credit cards – which will eventually let you borrow at significantly cheaper interest rates.
Borrowing money actually helps to rebuild a bad credit score, but only if you borrow responsibly in a way that you are able to make repayments on time.
Check your credit score before applying for any form of credit. Looking over your credit history may reveal it is in better shape than you think, and allow you to find and fix any problems on your record.
Compare the available guarantor loans using the tool above to see if there is one to suit your budget and needs.
Loans with a guarantor need to be considered carefully. Failure to repay the loan affects both the original borrower and the guarantor.
Choose a guarantor you have a good relationship with and honestly explain the risks to them of agreeing to vouch for your ability to repay the loan. If the worst happens and you default on your payments they could end up having to pay instead, or, if the loan is secured and they can’t afford to, could even lose their home. This is likely to also damage the relationship you have with this person.
Having a bad credit history makes it even more important to borrow responsibly, starting small and gradually working up to borrowing larger amounts only if needed. Think carefully about how much you are borrowing. If you are struggling with your existing debts our guide on getting out of debt could be useful, or speak to one of these debt help organisations.