A guarantor loan is a type of loan that requires someone else (a guarantor) to "guarantee" they'll pay off the debt if you cannot. These loans are designed for people with a bad credit history who may not be eligible for standard loans.

Lenders are more likely to offer a loan to borrowers with bad credit if a third party can guarantee the repayments should the original applicant default at any time. This reduces the risk to the lender, as the loan guarantor promises to pay back the loan back in case the borrower can’t.

Both the borrower and the guarantor sign the agreement, and the loan works just like any other loan: the borrower applies for the loan, if accepted, the borrower then pays it back in monthly instalments. Only if the borrower defaults on their payments does the guarantor step in to pay. The debt is unsecured, which means it’s not linked to your home or any other asset.

What are the requirements?

If you’re applying for a guarantor loan, you’ll need to be at least 18 years old, have a UK bank account, be a UK resident and be employed. You'll also need to demonstrate that you can afford the loan repayments. Depending on the lender, you may be subject to minimum income requirements or be a homeowner. All lenders accept applicants with poor credit as long as the guarantor has a good credit file.

Who can be my guarantor?

Guarantors are usually close friends, family members, or anyone you know you can trust. Once you’ve chosen your guarantor and they've agreed to help you, you’ll need to make sure they qualify and that they’re aware of their responsibilities.

In order to qualify, they need to:

  • have a regular form of income (this can include a pension)

  • have a UK bank account

  • be a UK resident

  • be at least 18 years old.

Requirements do vary from lender to lender, and some have stricter rules than others. Some lenders won’t allow you to put your spouse as your guarantor. Others require the guarantor to have a strong credit score or be a homeowner.

When approaching your guarantor, make sure they are aware of their precise responsibilities and that they'll have to pay off the loan if you are unable to. It’s also worth telling them what you’ll need the loan for so they are aware of your situation. When applying for your loan, lenders will ask about your relationship with your guarantor. They prefer you to pick someone you're close to as it is deemed that they will be more likely to take their responsibility seriously and pay back the loan.

How do I get a guarantor loan?

Decide first how much you want to borrow, who your guarantor will be and what you want your repayment period to be. Use our loan calculator to help you work out the total cost of credit, along with the APR (Annual Percentage Rate) and your monthly repayment amount.

Once you’ve picked a lender, you’ll need to fill in some forms online with your personal details and loan preferences. Avoid applying to several lenders at once as this could negatively affect your credit score. After submitting the application, you’ll then need to read an online agreement, sign it and send it to your guarantor so they can complete their part of their form and sign it. You’ll both need to submit documents proving ID, address, employment status and details of income.

When you complete the full application, the lender will do a “hard” credit check – a thorough check of your entire credit history. These checks leave a mark on your credit file, so if you fail to quality future lenders could view this as an increased lending risk. It’s important to note that not every application will be successful. All lenders have their own requirements, and every situation will depend on you and your guarantor.

Once you’re accepted, you’ll usually receive the loan within 48 hours. Some lenders will pay the loan into your guarantor’s account. This is to protect you and your guarantor against fraud and make sure your guarantor is aware that the loan has been sent out.

Every time you make a repayment, it’ll be recorded on your credit file and you’ll be able to build up your credit score. Repayments are usually split evenly across your entire term, meaning you’ll be paying the same amount every month. If you want to cancel your loan and have already submitted your full application, you will be able to cancel without a reason within 14 days (known as the "cooling-off period"), under the Consumer Credit Act. You can do this in writing, online or over the phone, and you’ll have to repay the entire loan in addition to any interest or fees you’ve accumulated.

How much do guarantor loans cost?

Since the lender is taking more risk by lending to a borrower with bad credit, interest rates can be higher than on normal personal loans. However, rates are usually lower than other bad credit loans, such as payday loans.

Find out why you should avoid payday loans.

The interest rate charged will depend on your specific circumstances, how much you're borrowing and the full term of the loan. Rates can vary massively – anywhere between about 25% and 70% APR. The interest rate depends on your lender and can fluctuate over time. You can usually borrow between £500 and £10,000 (sometimes more) for a period of between 12 months and 5 years – again, depending on the lender.

Advantages of loans with a guarantor

Guarantor loans are designed for those who are struggling to get approved for standard loans. The main advantage is that this allows those who have bad credit to borrow money. If you can afford to repay the loan and have a reliable guarantor with good credit, you’ll most likely be accepted for a guarantor loan.

Another advantage is that these loans can be processed quickly and arrive in your account in a few days. This means you can use these loans for emergency situations, essential purchases or to consolidate existing debt. This type of loan can also help you improve your credit score, which would allow you to apply for other loans and credit cards in the future with better rates.

Associated risks with using a guarantor for loans

The main risk that comes with a guarantor loan is held by the guarantor. If you’re not able to make the payments, the guarantor carries the risk and needs to make them for you. This will impact their credit score and it will make them harder to get credit in the future. If the guarantor isn’t able to make the payments, it can lead to court action or repossession of assets.

As the applicant, the main risk is that you struggle with the repayments and start to fall behind with your monthly instalments. This could have a negative impact on your credit score and your lender may take legal action if both you and your guarantor are unable to make the payments. It's worth mentioning that this could also have an impact on your relationship with your guarantor.

For free debt advice contact the Step Change Charity, Citizens Advice Bureau or the National Debtline.

Things to look out for when comparing best guarantor loans

Here are something to look out for when comparing guarantor loans:

  • Pay close attention to the APR, which is the overall interest rate you’ll be paying every year on the loan

  • Using a soft search facility to find out your eligibility for a loan

  • Check the monthly payments and the repayment period in years. Make sure your guarantor is eligible if, for example, they aren’t a homeowner.

  • There are several options when it comes to picking a guarantor loan, so it’s wise to take the time and compare all your options before applying. Check out our options above to get started.

What can bad credit guarantor loans be used for?

A guarantor loan for bad credit can be used for anything from car repairs to holidays. You can also use the loan to improve your credit score or to consolidate existing debt.

Tips for guarantors

  • Before agreeing to be someone’s guarantor, consider asking a few questions:

  • Why does the borrower need a guarantor?

  • Is the borrower responsible enough?

  • Would you be willing and able to pay back the loan if the borrower can’t or won’t?

  • Are you willing to risk legal action from lenders if the money is not paid back?

When it comes to acting as a guarantor, it’s important to be fully aware of the situation and potential repercussions. Whenever in doubt, seek legal advice. Here are a few other tips:

Get 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. This means you'll be ready in case you have to start paying the loan back.

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. You may also be required to provide a “secured guarantee” such as a car or savings. Make sure not to add any items that may be worth more than the loan, like a house, for example.

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. If the borrower starts missing their payments and the lender starts the repossession process, you’ll receive copies of the repossession notices. Make sure to keep all the documentation somewhere safe and create digital copies if necessary.

You can read more about whether you should agree to be a guarantor

Alternatives to guarantor loans

There are some alternatives to guarantor loans that may be worth considering depending on your specific circumstances.

Credit union loans

Credit unions are financial institutions that are like banks, except they are non-profit and run by members. They offer smaller loans at a much lower interest up to a legal maximum of 3%. Credit unions can usually lend for up to five years if the loan is unsecured, and up to ten years if the loan is secured against something such as your home or car.

These kinds of loans are also 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 the credit union 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 collateral such as a house or car and are usually more expensive and riskier. Make sure to compare loan types with soft searches before applying for an unsecured loan. You’ll know if you could get approved before applying and it won’t affect your credit file.

P2P lending

Peer-to-peer lending platforms are like marketplaces between individual lenders and borrowers. As a borrower, you can receive a loan directly from another person via an online platform. This can be a good option for those who don’t want to go through a bank and want more flexible repayment periods. However, many P2P platforms will require you to pass a credit check and you may need to pay an application fee. Because of the risk taken on by the lenders, the best deals usually go to those with the best credit scores.

Lenders should be aware that any money invested in P2P is not protected under the Financial Services Compensation Scheme (FSCS), meaning you could lose your money if the P2P company goes bust.

Credit cards

Finally, credit cards are another borrowing option for those with poor credit. If you already have several credit cards, pick the one with the lowest interest rate – some even offer 0% for a certain period of time. If you don’t have a credit card, you can apply for one designed for those with poor credit. You are more likely to be approved, however, the APR will likely be much higher than regular credit cards.