What are guarantor loans?
If you have a bad credit score or low deposit getting a loan can be difficult. That's where a guarantor loan could help.
A guarantor loan can be either a secured or unsecured loan that requires you to have a guarantor - a person willing to meet your repayments if you find yourself unable to.
Guarantor loans are becoming increasingly common and offer an alternative form of borrowing to those with a poor credit history.
There are many specialist guarantor loan companies so it's worth shopping around to find the best rates.
How do guarantor loans work?
When you apply for your guarantor loan you are supplying the details of someone who will pay off your loan should you default on your payments.
This reduces the risk for the lender, meaning they are able to offer you lower interest rates than you could obtain elsewhere.
Your guarantor will only be called to step in as a last resort move and are not normally involved in repayments.
Who can be your guarantor?
A guarantor is usually a close friend or family member who trusts you to keep up with your repayments, but it can be anyone.
Whilst they can be related to you, they cannot be financially linked to you as your spouse.
Typically, guarantors have to be aged over 21 with a good credit score.
As they will have a credit check to confirm that they have a good credit score, they will need to provide identification, proof of address, bank statements and other details.
Often they will need to be a UK homeowner too. If the lender requires security, they need to have enough equity to match the value of your loan.
Guarantor loans - borrowing with bad credit
Guarantor loans are targeted at those with bad credit scores, namely if you have poor credit and have been turned down by mainstream lenders
Having someone support you can help you borrow at more sustainable rates and make it easier to pay back your debts.
Often this enables you to borrow higher sums than you would be able to from payday loan companies and other bad credit lenders.
Whilst they offer lower rates of interest than payday loans, they are still expensive with typical APRs around 50%.
Rebuilding your credit score
Meeting all the repayments of a guarantor loan can rebuild your credit score. This can make it more likely that you'll be accepted for mainstream unsecured loans and credit cards
in the future with lower rates of interest.
You can also use credit builder cards
to improve your credit score.
Bear in mind that while borrowing money actually helps to rebuild a poor credit score, it will only help if you borrow in a sustainable manner and can meet all your repayments.
If you're unsure of your credit score it could be worth your time to check your credit report
before applying for any form of credit.
Your score could be better than you think, or you can find and fix any problems on your record.
What to watch out for
Firstly make sure you have a good relationship with your guarantor and that they understand the risks involved.
If the worst happens and you default on your payments they could end up having to cover your repayments, or even lose their home.
If you have poor credit make sure to only borrow responsibly, and gradually work up to borrowing larger amounts.
Whilst a typical guarantor lender offers loans ranging from £1000 to £7500, 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.
Compare guarantor loans
Take a look at the available guarantor loans above to see if there is one to suit your budget and needs.