Everything you need to know about guarantor loans
Key takeaways
Guarantor loans can help if you have a poor credit score, or no credit history
A guarantor secures the loan and is jointly responsible for it being paid back
The guarantor will need to supply their financial details, and a lender will run a credit check to see if they are suitable
What is a guarantor loan?
A guarantor loan is a loan whereby someone agrees to pay the loan if the borrower can’t pay it back. This reduces the risk to the lender of the loan not being repaid. These loans are specifically designed for people with low credit scores.
If the borrower can’t pay the loan back, the guarantor agrees to make these payments. In some cases, a guarantor may put an asset they own – such as their home – up as security against the loan. Usually, a guarantor is a family member or a friend and because both the borrower and the guarantor are legally liable for the loan, there's a significant level of trust involved.
Who can be a guarantor?
Guarantors are typically people who are close to the borrower who have a strong credit history. Each lender has its own rules around who can be a guarantor, but they usually need to be at least 21 years old and live in the UK.
The lender will check their credit score and they will usually have to supply the following information:
Full name, address, and details of their job
Information about their income
A list of their current incomings and outgoings, plus any financial dependents
Their address history for the last three years
Is it risky to be a loan guarantor?
If you agree to be a loan guarantor, you need to carefully consider what might happen if the borrower can’t pay back their loan. Legally you will be responsible for making the payments if this happens which could cost you a lot of money and impact your relationship with the borrower.
You will need to think about what might happen in the following circumstances:
The borrower can’t pay back the loan, and you need to clear the debt
You lose contact with, or fall out with, the borrower
Your circumstances change and you are no longer able to afford paying back the loan, if the borrower can’t
The impact to your credit score if you and the borrower aren’t able to make repayments
The pros and cons of guarantor loans
Like any financial product, guarantor loans come with their own set of advantages and disadvantages. It's essential to weigh these before making a decision.
Advantages
Access to loans with poor credit: If you have a poor credit history, or no history at all, then a guarantor loan can give you access to cash when you need it. People mostly use guarantor loans to cover unexpected costs, such as car and boiler breakdowns. Guarantor loans can also be helpful to cover expensive life events such as weddings and home improvements
Borrowing moremoney: With a guarantor's backing, you might be able to borrow more than you could on your own.
Improving credit score: Having a guarantor can make it easier for your loan to be accepted even if you have a low credit score. Keeping up with your repayments on your guarantor loan can boost your credit score over time.
Disadvantages
Higher interest rates: Guarantor loans often come with higher interest rates due to the perceived increased risk to the lender.
Relationship risks: The financial and emotional stakes can put a strain on relationships if difficulties arise.
Legal implications for guarantors: If your guarantor refuses to pay then they can expect to face legal action, including being asked to come to court. If this is a secured loan, then your guarantor may lose their home.
What are some alternatives to a guarantor loan?
If you can't find a guarantor or prefer not to involve someone else in your financial affairs, these are some alternatives to consider:
Loans for bad credit
You could be accepted for a loan with bad credit without a guarantor.There are bad credit specialist lenders out there who lend to people with poor credit scores. However, because your credit score isn’t the best, you’ll find it harder to get a loan and the loans you’ll be accepted for will have higher interest rates.
Secured loans
Another option if you have a low credit score but are a homeowner, is a secured loan. This type of loan uses your property as collateral, which means you could lose your home if you fail to make repayments.
Credit builder cards
If you have a low credit score, a credit builder credit card could help. If you are accepted these cards are designed to help you improve your credit score over time, if you follow the rules and make repayments on time.
Credit union loans
You may be able to take out a loan from a credit union. They tend to be available for people with poor credit scores at cheaper rates than some of the main high street lenders.
Is a guarantor loan right for you?
A guarantor loan can be a useful way to borrow money if you have a poor, or non-existent, credit score. It can mean you can borrow more than you could if you applied on your own and the interest rate charged could be lower too.
However, these loans can be more expensive than standard personal loans, and if things don’t work out they can ruin the relationship between you and the guarantor, end up harming your credit score, and costing them a lot of money. While guarantor loans are a good option for those with bad or no credit history, they are not without their risks.
Other useful guides
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Rebecca Goodman
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Rebecca is an award-winning financial journalist with over a decade of experience writing for print and online media. Her mission is to take the jargon out of personal finance and to help everyone...
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