Guarantor loans

Explaining guarantor loans for those with a poor credit score

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If you can’t get a loan due to your poor credit history, one option is to ask a family member or friend to be a guarantor.

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What is a guarantor loan?

If you’re struggling to take out a loan because lenders such as banks and building societies take a dim view of your credit profile, an alternative might be to get a guarantor loan.

This is where a family member or friend guarantees to honour the debt if you default on your repayments.

Guarantor loans are usually taken out by those with bad credit profiles because they find lenders are unlikely to offer them a loan without some sort of validation or guarantee. The guarantor effectively assures the lender it will get its money back because he or she will pay back your loan if the original borrow fails to do so.

Lenders often require the guarantor to be a homeowner or to be able to demonstrate that they have sufficient assets or wealth to cover the loan.

High rates of interest

Guarantor loans usually have a higher rate of interest than standard loans to reflect the borrower’s poor credit profile and the level of risk the lender is taking on.

The actual rate of interest rate charged will depend on a range of factors, namely the loan amount, the duration and the borrower’s personal circumstances.

To secure a guarantor loan, you’ll need to be at least 18 with a bank account, and you will usually need to be in work. The guarantor usually needs to be over 21 years, with a good credit rating.

How do guarantor loans work?

Guarantor loans are an option for someone whose application for a standard loan is turned down. By having someone else act as a guarantor, they may be able to obtain a loan, albeit it at a higher rate of interest than normal.

With guarantor loans, the guarantor will only be called upon as a last resort - that is, if you default on the loan. They will then be required to take over the repayments until the loan is paid off.

To be a guarantor, they must be a friend or family member, but they cannot be financially connected to you – so no partners or spouses.

If you are to be a guarantor then you need to think about the person taking out the loan. Do you trust them to make the all the payments on time each month? To your knowledge, can they afford it? Most of all though, are you comfortable maintaining the payments should anything go wrong?

If the answer to any of these questions is no, then you probably shouldn’t be a guarantor to your friend or family member.

What are guarantor loans good for?

If you have a poor credit score, a guarantor loan could help build it up. This is because making the monthly payments works in your favour, as every time you make a payment on time, then you are given a ‘good’ mark on your rating.

Find out what else helps you get a good credit score.

This makes it much more likely that you’ll be accepted for credit – such as a standard unsecured loan, a mortgage or a credit card – without having to use a guarantor. 

However, credit scores can only be improved by sticking to the payment plan and paying each and every month on time. Otherwise your credit score will be further damaged and you will again struggle to secure a loan.

It is always a good idea to check your credit rating before you apply for a loan or credit card, as if you are rejected it will damage your score. The same is true when you make too many applications in a short period of time.

What are my other options?

A guarantor loan is not the only option if you need to borrow but don’t have a great credit profile. You can compare other poor credit history loans using our Smart Search facility. This will show you loans that you are likely to be offered, and because it doesn’t leave a mark on your credit report, using it won’t harm it won’t your credit score.

 

This article is provided for information purposes only. MoneySuperMarket does not offer guarantor loans.

Moneysupermarket is a credit broker – this means we’ll show you products offered by lenders. We never take a fee from customers for this broking service. Instead we are usually paid a fee by the lenders – though the size of that payment doesn’t affect how we show products to customers.

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