Asking a friend or family member to be a guarantor could help you get the loan you need. Here is how guarantor loans work and everything you need to know about them.
If you need to get a loan but can’t because you have a poor credit history, or you’ve never borrowed before so have no credit history, all is not lost. By asking someone to be a guarantor you can increase your chances of being accepted for a loan.
A guarantor loan is like any other unsecured loan in every way. The only difference is that the loan is “guaranteed” by a third party, known as a guarantor. The guarantor acts as a backup to repay the loan in the event that the borrower is unable to do so.
Guarantor loans work just like other personal loans, other than the need for a guarantor. These loans are typically designed for people with bad credit, or for first-time borrowers who have no track record for lenders to base their decision on.
The guarantor takes on the responsibility of making any missed payments and paying off the loan if you can’t.
If you're a first-time borrower with no credit history, or you have bad credit, you'll either find it difficult to get a loan, or you'll be offered an extremely high interest rate. That's because most lenders will be hesitant to lend to someone with a bad or no credit history.
When you get a guarantor to “guarantee” the loan, it is their responsibility to repay the loan if you are unable to. For the bank that reduces the risk of it losing money on the loan as there’s a safety net, so it can be more confident about lending to you.
Anybody can be a guarantor as long as they are over the age of 21, have a good credit history, and are able to afford the monthly payments.
Typically, the guarantor is a parent, relative or friend who is willing to take on the responsibility. Spouses are generally not eligible unless they have separate bank accounts and finances.
When you’re looking for a guarantor, it should be someone you feel comfortable talking about your finances openly with.
Interest rates on guarantor loans tend to be higher than those on standard personal loans. This is because the lender is taking on more risk in lending to a borrower with bad credit, even with a guarantor. The actual interest rate you are charged depends on a number of factors, including your specific financial circumstances, the loan amount and the term of the loan.
Here is how much a £5,000 guarantor loan taken out over three years could cost:
|APR||Monhly payments||Interest||Total to pay back|
You can use our loan repayment calculator to check how much different loans could cost by changing the amount, the APR and the loan term.
If you are the main borrower the risks of taking out a guarantor loan are the same as any other personal loan, which include:
The risk of taking on a debt that becomes difficult to manage, although lenders must check that you can afford to pay back the loan when you apply
Damage to your credit record if you miss payments or default on the loan, which could make it harder to get credit in the future
Legal action to reclaim the money
The loan guarantor is also at risk because they are equally liable to repay the loan if the main borrower defaults.
The risks associated with guarantor loans are the same for the main borrower as with any loan. However, there’s also a risk to the guarantor. If you default on the loan it becomes their responsibility to repay it. That is why anyone considering becoming a guarantor should think carefully about whether to do it.
You should also bear in mind that if something goes wrong with the loan the relationship between you and the person acting as your guarantor could be damaged.
Before applying for a guarantor loan, make sure you ask yourself these questions:
How much do you need to borrow?
How long do you need to repay the loan?
Which loans are you eligible for?
Once you have answers to these questions, you can compare guarantor loans to find the best interest rate possible.
Once you have found the lender you want to borrow from, the process of applying for a guarantor loan is similar to any other loan. You provide your personal and financial details to the lender. The only difference is you need to provide the guarantor's personal and financial details as well.
If you are approved for the loan, most lenders will transfer the funds within 48 hours. Often, some lenders will transfer the funds to the guarantor's account. This is to make sure they have agreed to act as a guarantor on your behalf.
They can either transfer the money to you or, if they change their mind within the 14-day cooling-off period, return it to the lender.
If you want to avoid getting a guarantor loan, there are some alternative options you can consider.
Credit unions: There are limits on how much credit unions can charge for loans, so they can be a good option if you have bad credit and there is one where you live. Find out more on the MoneyHelper website.
Bad credit loans: Some lenders are more willing to consider applications if you have bad credit without the need for a guarantor, but the rates may be higher. Here is how bad credit loans work.
Salman is our personal finance editor with over 10 years’ experience as a journalist. He has previously written for Finder and regularly provides his expert view on financial and consumer spending issues for local and national press.