Guarantor loans

What are guarantor loans?

Guarantor loans are a type of personal loan typically used by people who struggle to get approved for credit. For instance, they can be popular with people who have a bad or no credit history as this makes lenders less likely to offer them a loan.

They work like ordinary loans, where you borrow a lump sum which is paid back in instalments, with interest attached.

However, the key feature of a guarantor loan is that you need a friend or family member to agree to pay back your loan if you are unable to. 

Guarantor loans offer an alternative way to access credit, particularly if you’re struggling to get accepted for traditional loans. 

There are more providers now, which means there’s a lot more choice. That’s why it’s really important to compare costs and charges to find the best guarantor loan for your circumstances.

Interest rates for guarantor loans can be extremely high, sometimes as much as almost 80% APR. Depending on the term of the loan, that means you could end up paying back twice what you borrowed. So, think carefully before taking one out.

Which is the best guarantor loan for me?

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 up to £20,000.

You will need to supply the details of your guarantor when you apply for the loan. They will have to agree to repay your debt if you can’t. Because loans with a guarantor reduce the risk for the lender, they should be able to offer you lower interest rates than you could obtain elsewhere. You may even find that a guarantor allows you to get a loan where otherwise you would have been rejected.

Your guarantor will only be asked to make payments as a last resort if you miss instalments. Some lenders will take the money from the guarantor automatically, using a continuous payment authority (CPA).

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. Think carefully about how it could affect your relationship. 

Who is the best person to ask to be a guarantor?

A guarantor is usually a close friend or family member, but it can be someone else you know who trusts you to keep up with repayments. It could even be a colleague or boss. Some lenders will limit who you can ask. 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 18 years old with a good credit history, and preferably a homeowner. Each lender has their own requirements, for instance some say the guarantor must be over 21 and some have maximum age limits.

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 needed. A guarantor will need to provide identification, proof of address, bank statements and other details.

Many lenders prefer a guarantor who is a UK homeowner and will check that they have enough equity in their home to cover the value of your loan.

I have bad credit. Is it best to use a guarantor 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.

How much do guarantor loans cost?

Guarantor loans are still very expensive compared to standard personal loans or credit cards, with typical APRs, or annual percentage rates of up to almost 80%.

How does a guarantor loan compare to other loans?

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 the most competitive high street loans. However, you should get a better interest rate than with other bad credit financing or products like payday loans.  Repaying the loan instalments on time and in full can help rebuild your credit score.

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.

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.

What are the risks of guarantor loans?

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.