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A guarantor loan helps if you have a poor credit history or are struggling to get a loan

Discover who can be a guarantor and the application process for taking out a guarantor loan

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Author

Lucinda O'Brien

Editor

Salman Haqqi

Fact checker

Sara Benwell

Last updated

November 7th, 2024

What is a guarantor loan?

The key difference between a guarantor loan and other types of loan is that you need a third party – typically a family member or friend – to “guarantee” to pay off the debt if you can’t. The mechanics of the loan are the same as with other types: you borrow money from a lender then pay it back in instalments, which include interest.

Guarantor loans are designed for those who may not be eligible for standard loans because they have a poor or no credit history. Lenders are more likely to grant this type of loan to those with bad credit because it reduces their risk – if the borrower defaults at any time on their repayments, the guarantor steps in to pay back the loan.

Bear in mind that the interest on guarantor loans is often extremely high, sometimes as much as 50% APR.

Debt charity StepChange warns that this means you could end up paying back more than double the amount you borrowed over the period of the loan.

Guarantor loans are designed for those who may not be eligible for standard loans.”

Can I get a guarantor loan?

To qualify for a guarantor loan, you need to be:

Over 18
A UK resident, or have a UK bank account
Able to demonstrate that you can pay back the loan

Some lenders also require you to

Have a minimum level of income
May also have a maximum age limit based on how old you will be when you finish paying back the loan.

Many lenders will also say

You cannot be subject to a current Individual voluntary arrangement (IVA) or bankruptcy order.

Who can be a guarantor?

A guarantor needs to be someone who is willing to support you and is:

Someone who knows you well
Aware of the responsibilities of a guarantor
At least 18 (some providers have a minimum age of 21)
Younger than 75 at the end of the loan term
In receipt of a regular income (a wage or pension)
A UK resident
A UK bank account and debit card holder
Able to afford the monthly payments if you can’t
Someone with a good credit record

Some loan providers have stricter rules and may also insist that your guarantor is:

A homeowner

Not your spouse
Receiving a certain level of income

Choosing your guarantor

You need to make sure that your chosen guarantor knows what responsibilities they are taking on, including having to step in and pay off your loan if you are unable to.

It’s advisable for any guarantor to take legal advice before signing a contract.

You should also let your guarantor know why you want the loan and how you plan to repay it.

Your lender will ask about your relationship with the guarantor. Lenders prefer someone close to you, like a family member or friend, because they believe that they are more likely to take their responsibility seriously and pay back the loan.

How to choose the best guarantor loan for you

Take the following steps to find the right guarantor loan to suit your needs...

How much money you need plays a major role in whether you'll be accepted for a loan, as you can only borrow what the lender thinks you can afford to pay back.

Getting a sense of how much you can afford to pay each month after your living costs is vital for making sure you get the right deal for your circumstances.

Before you compare guarantor loans, check if the person you have in mind to be your guarantor is happy to do so and discuss the loan and repayments with them.

By using our comparison service, you can make sure you know what deals are available in the market so you can make an informed decision about which to choose.

Pros and cons

Pros

Allow people with bad credit to borrow money

Processed quickly and arrive in your account within a few days, so you can use them for emergencies or essential purchases

If repaid on time, help to improve your credit score, which would allow you to apply for loans and credit cards with lower rates in the future

Cons

Higher interest rates than standard personal loans

Your credit score is further damaged if you can’t make repayments

Risk your guarantor isn’t able to make the repayments if you can’t, and it would then impact their credit score and could see them facing a CCJ.

Damage relationship with guarantor if you fail to make repayment

How much does a guarantor loan cost?

Since the lender is taking more risk by lending to a borrower with bad credit, interest rates are typically higher on guarantor loans than on regular personal loans.

The interest rate charged will depend on your specific circumstances and can vary significantly – anywhere between about 30% and 50% APR.

The interest rate also depends on your lender and can fluctuate over time. You can usually borrow up to around 4.5 times the guarantor’s income, for a period of between one and seven years – again, depending on the lender.

You can usually borrow between £1,000 and £15,000, perhaps more depending on your and the guarantor’s circumstances."

What happens if I want to be a guarantor?

Before agreeing to be someone’s guarantor, it’s vital to be fully aware of what’s involved and the potential repercussions. If you’re in doubt, seek legal advice. Here are a few useful tips:

Make a written contract

Write out a simple written contract with the borrower stating how you want to communicate, how often you want to receive updates, and in what circumstances they should get in contact with you.

Limit your liabilities

Ensure that the guarantee is limited to that specific loan and that the borrower cannot use your guarantee for other loans such as mortgages or credit card debt.

Keep all documentation

When agreeing to be a guarantor, you’ll receive a copy of the agreement, the borrower's repayment schedule and the guarantee contract. Make sure you keep all the documentation somewhere safe and create digital copies if necessary.

“It’s important that you and the guarantor are fully aware of the risks involved. Interest rates on these loans can also be quite high, and thus lead to further problems, so it's better to consider all other options before you opt for a guarantor loan.”

Salman Haqqi

Senior Personal Finance Editor

Alternatives to guarantor loans

Credit union loans

Credit unions often offer smaller loans at lower interest rates than those designed for people with bad credit. Credit unions can, by law, only charge a maximum of 3% a month (42.6% APR) in England, Scotland and Wales and 1% in Northern Ireland (12.68% APR). They usually lend for up to five years if the loan is unsecured, and up to 10 years if the loan is secured, although some let you take out a secured loan for up to 35 years.

These loans can be helpful for people with bad credit and sometimes offer options to pay loans back weekly rather than monthly. However, you’ll have to be a member of a credit union for a certain period of time in order to apply for a loan and some require you to build up some savings beforehand.

Unsecured loans

Unsecured loans are loans that don't require an asset, such as a house or car, to be used as security. They’re usually more expensive than secured loans as they’re riskier for the lender.

Make sure you use an eligibility checker before applying for an unsecured loan. This lets you find out if you’re likely to be approved for the loan you’ve chosen so you don’t end up making multiple credit applications over a short period of time, which can negatively affect your credit score.

If you have bad credit, you may still be able to get a loan, but you'll usually pay a higher interest rate and be more limited in how much you can borrow.

Credit cards

Finally, credit cards are another borrowing option. Pick one with the lowest interest rate for borrowing that you can get. Some even offer 0% on purchases for a certain period of time when you first take them out.

If you have bad credit, you could opt for a credit-building credit card. This type of card has more lenient eligibility requirements. However, as with most bad credit borrowing, the interest rate is likely to be much higher than for regular credit cards, and credit limits will also be lower. If you use it responsibly, however, it can help to improve your credit score.

Alternatives to guarantor loans

Credit union loans

Credit unions often offer smaller loans at lower interest rates than those designed for people with bad credit. Credit unions can, by law, only charge a maximum of 3% a month (42.6% APR) in England, Scotland and Wales and 1% in Northern Ireland (12.68% APR). They usually lend for up to five years if the loan is unsecured, and up to 10 years if the loan is secured, although some let you take out a secured loan for up to 35 years.

These loans can be helpful for people with bad credit and sometimes offer options to pay loans back weekly rather than monthly. However, you’ll have to be a member of a credit union for a certain period of time in order to apply for a loan and some require you to build up some savings beforehand.

Unsecured loans

Unsecured loans are loans that don't require an asset, such as a house or car, to be used as security. They’re usually more expensive than secured loans as they’re riskier for the lender.

Make sure you use an eligibility checker before applying for an unsecured loan. This lets you find out if you’re likely to be approved for the loan you’ve chosen so you don’t end up making multiple credit applications over a short period of time, which can negatively affect your credit score.

If you have bad credit, you may still be able to get a loan, but you'll usually pay a higher interest rate and be more limited in how much you can borrow.

Credit cards

Finally, credit cards are another borrowing option. Pick one with the lowest interest rate for borrowing that you can get. Some even offer 0% on purchases for a certain period of time when you first take them out.

If you have bad credit, you could opt for a credit-building credit card. This type of card has more lenient eligibility requirements. However, as with most bad credit borrowing, the interest rate is likely to be much higher than for regular credit cards, and credit limits will also be lower. If you use it responsibly, however, it can help to improve your credit score.

How can I manage my debt?

For those who are having trouble keeping up with debt payments, it's really important to seek help. The first step is to speak to your lenders and see if you can work out a manageable payment plan to reduce your debt.

If that doesn’t work, there are debt charities you can contact that offer free debt advice to help you get out of debt. For free debt advice contact the Step Change, Citizens Advice or the National Debtline.

FAQs

How much can I borrow with a guarantor loan?

It varies depending on your credit history and your income, but you can usually borrow between £1,000 and £15,000.

Are guarantor loans more expensive?

Yes, they can cost more than standard unsecured loans because the rates are higher, but they may be cheaper than other bad credit loans.

Can I list my spouse as a guarantor?

In some cases, yes – providing they have a separate bank account. Other providers will not allow a spouse to be a guarantor.

What happens if I cannot pay back my loan?

The person listed as your guarantor will be responsible for paying back your loan. If your guarantor cannot pay your loan, they could be taken to court.

What happens if I die before my loan is paid back?

Your guarantor may have to pay back the rest of your loan. Read the terms of your loan and check your guarantor is happy with them before you apply.

Will a guarantor loan affect my credit rating?

Yes, if you fail to make your repayments. Be aware that making too many applications for credit in a short space of time can also negatively impact your credit rating.

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About the author

Lucinda O'Brien

Lucinda O'Brien has spent the past 10 years writing and editing content for regional and national titles. She applies her industry knowledge to ensure readers can make confident financial decisions.

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