What is a guarantor loan?

A guarantor loan is like an 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.

How do guarantor loans work?

Guarantor loans work just like other personal loans, other than the need for a guarantor. These loans are typically meant for people with bad credit, or for first time borrowers who don't have a credit history.

The guarantor takes on the responsibility of making nay mis

Why do you need a guarantor?

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 losing money on the loan, as there is a backup to get back their money.

Who can be a guarantor?

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 usually 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.

How much do guarantor loans cost?

Interest rates on guarantor loans tend to be higher than those on standard personal loans. This is because the lender is taking 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.

How much do guarantor loans cost?

Interest rates on guarantor loans tend to be higher than those on standard personal loans. This is because the lender is taking 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.

A guarantor loan costing example

Here is how much a 5,000 guarantor loan taken out over three years could cost:

APRMonthly paymentsInterestTotal to pay back
15%171.031,157.086,157.08
30%202.852,302.607,302.60
50%244.183,790.488,790.48

You can use our loan repayment calculator to check how much different loans could cost, by changing how much you want to borrow, the APR and the loan term.

What are the risks?

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 getting into debt that becomes difficult to manage

  • Damage to your credit record if you miss payments or default

  • 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.

What are the risks of guarantor loans?

The risks associated with guarantor loans are similar to most loans, and include:

The risk of getting into debt that becomes difficult to manage
Damage to your credit record if you miss payments or default
Legal action to reclaim the money.

Guarantor loans, however, have an additional risk to the guarantor. If the main borrower defaults, it will be their responsibility to repay the loan. This is why it's advised to think carefully about being a guarantor.

How to get the right guarantor loan?

Before applying for a guarantor loan, make sure to answer these questions:

  • How much you need to borrow?

  • How long you need to repay the loan?

  • Which loans you aren't eligible for?

Once you have answers to these questions, you can compare guarantor loans to find the best interest rate possible.

Applying for a guarantor loan

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 may transfer the funds to the guarantor's account. This is to make sure they have agreed to act as a guarantor on your behalf.

Alternatives to guarantor loans

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 Money Advice Service 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.