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A guarantor loan is a type of loan you take out with someone else – usually a family member – who promises to pay your debt if you’re unable to. This person is referred to as the guarantor.


How do guarantor loans work?

Guarantor loans are an alternative option for people who might otherwise struggle to get a loan, often due to a poor or limited credit history. The guarantor acts as a safety-net for your lender, so if you default on your repayments they’ll still get their money back.

As long as you have an agreement with your chosen guarantor, anyone can apply for a guarantor loan – so long as you’re:

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Over 18 years old

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A UK bank account holder

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Full time employment

Your guarantor will generally be a close friend or family member, generally over 21-years-old but some lenders may accept guarantors as young as 18. They’ll also need to hold a UK bank account and have a good credit history – in order to prove they’ll be able to make the repayments if you aren’t able to.


Advice for guarantors 

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?

Pros

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You may qualify even if you have a poor or limited credit history

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You might be able to borrow more money than with other loan types

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It’s a chance for you to build your credit score by making your repayments on time

Cons

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The interest you’ll pay on your loan can be higher than standard

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If you don’t make your payments you might risk your relationship with the guarantor if you haven’t forewarned them

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If you’re a guarantor there’s a risk you could be taken to court or lose your own assets if you also can’t make the repayments

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Who can I have as a guarantor?

It is up to you to choose a guarantor, but it should be someone who you trust – such as a close friend or family member. In order to qualify as a guarantor, they’ll need to meet the following criteria:

  • They must be at least 18 – or in some cases 21
  • They must be in full-time employment

You won’t be able to use your spouse or someone with whom you’re financially linked – for example, anyone with whom you have a joint bank account or mortgage.

What if I can’t make my repayments?

If you can’t make your loan repayments, it will be your guarantor’s responsibility to ensure the debt is paid.

What if my guarantor can’t or won’t make my repayments?

If your guarantor cannot make the repayment or if they refuse to pay, the lender may take them to court for breaching their contract terms.

Can your credit score be affected if you’re a guarantor?

If you sign up as a guarantor on a loan, your credit score won’t be affected as long as you make the defaulted repayments on time if and when you have to – but if you don’t keep up with the repayments then this will impact your credit report.

Do guarantor loans have higher interest rates?

As guarantor loans are generally intended for people with poor or limited credit, you’ll find that they have higher interest rates than standard loans. However, the actual rate you get will depend on other factors including the amount you’re borrowing and over how long.

How much can I borrow with a guarantor loan?

If you’re looking to take out a loan with a guarantor, you’ll generally be able to borrow between £1,000 to £10,000.

Guide to loans

Many households are struggling to make ends meet as the cost of living keeps rising. There's little spare cash around to build up an emergency fund, which means it can be tricky to pay for a new washing machine or boiler if your old one breaks down. Maybe you need a new car, or perhaps you're planning a holiday, a wedding or a home makeover?

Pros and cons of loans

Let’s face it, most people at some point in their lives need to borrow some money. So it’s important to understand the pros and cons of the different types of loan, as well as how to secure the best rates. If not, you could end up with a poor deal – and costly credit can send you into a downward debt spiral.

Secured loans

Loans can broadly be divided into two categories: secured and unsecured. With a secured loan, the lender will insist on some sort of security against the money you borrow, often a house or car. If you default on the payments, the bank or building society can then sell the asset to clear the debt.

You can usually borrow large amounts with a secured loan, and at a lower rate of interest. Plus, you can pay back the debt over a long time period, perhaps 10 or 15 years.

However, secured loans are more risky than unsecured loans because you could lose your collateral if you cannot clear the debt. You should therefore think very carefully - and consider other options - before taking out a secured loan.

Help with budgeting

You can typically borrow as little as £1,000 up to a maximum of £25,000 with an unsecured loan – also known as a personal loan.

The interest rate is usually fixed and you pay back the debt over a set term, normally one, three or five years. Personal loans can therefore help you to budget because you know at the outset the full cost of your borrowings and how long they will take to clear.

Wedding loan

For example, if you are getting married and the wedding is set to cost £7,500, you could take out a loan for £7,500 at 3% over three years. Your monthly payments would be fixed at £217.98 and you would pay total interest of £347.11 over the 36-month term.

Representative example: If you borrow £7,500, you would make 36 monthly repayments of £217.98. The total amount repayable is £7,847.11. Representative 3.0% APR, 3.0% (fixed) p.a.

Debt consolidation

If you have run up other debts at high rates of interest, a personal loan can be a good way to manage your borrowings and bring down the cost. Let’s say you have built up a debt of £3,000 on a store card that charges interest of 29%. You could take out a loan for £3,000 at, say, 9%, to pay off the store card balance and reduce the monthly payment. If you also cut up the store card, you would not be tempted to go on a spreading spree and add to your debt burden!

Interest rates

Interest rates on personal loans vary across the market, but as a rough rule of thumb, the more you borrow, the lower the rate. For example, you might pay interest of 9% on a £3,000 loan, but only 3% on a loan of £7,000. It can therefore make sense to borrow a larger amount, say £7,000 instead of £6,500. Just make sure you don’t take on a debt that you cannot afford to repay.

Term of the loan

The size of the loan will to some extent determine the term of the loan. It is, for example, difficult to pay off a £7,000 loan in just one year as the monthly payments would be relatively high. However, if you borrow only £1,000, a term of 12 months is more manageable.

You also have to consider the cost implications of the loan term as the longer the term, the lower the monthly payments – but the higher the total cost. For example, let’s say you borrow £3,000 over three years at 7%. The monthly payments would be £93, so you would pay total interest of £348. If you extended the term to five years, the monthly payments would drop to £60, but you would pay £600 in total interest.

Credit record

The interest rates on personal loans depend partly on the loan amount and term. But lenders also assess your creditworthiness, usually by looking at your credit file.

The lowest rates are reserved for the best customers – that is, borrowers with a spotless credit record. If you are judged likely to default on the loan because of a poor credit history, you will be charged a higher rate of interest or your application will be turned down.

In other words, there is no guarantee that you will qualify for the advertised rates. Lenders are allowed to boast of low representative rates if those rates are charged to 51% of successful applicants, which means almost half could be charged a higher rate.

Early repayment

You can pay off your debt before the end of the loan term if you come into some cash. But watch out for early repayment fees. Many lenders levy a penalty for early repayment, which could wipe out any potential interest savings. Some lenders also charge arrangement fees for personal loans, which you should factor into your cost calculations.

Work out a budget

You should try to work out how much you can afford to borrow and pay back before applying for a loan. This way you can look for loans in your borrowing range, giving yourself the best chance of being accepted as well as ensuring you don’t take on a loan that you can’t afford – you could even try MoneySuperMarket’s loan calculator for guidance.

Avoid impulse borrowing

Likewise it’s better to avoid taking out a loan without thinking carefully whether you need it, and whether the cost of the loan is worth what you’re taking it out for. For example, it’s probably not a good idea to take a loan out for everyday purchases – a credit card might be more suitable.

Watch out for temporary interest free periods

Interest free periods can be useful when you’re borrowing, but you should always keep an eye on how long this will last. Once the interest free period ends you may be moved on to a high rate instead, so it can be a good idea to pay off as much of your debt as you can during this interest free period.

Plan for rate changes

Variable rate deals mean the interest rate at which you make repayments can change whenever the lender decides to change it – though often lenders will use the Bank of England base rate as a guideline. While this means that your repayments could be less if the base rate falls, they could also go up if the rate rises, so it could be a good idea to ensure you’ll be able to cope with interest rate fluctuations before taking out a variable rate loan.

Avoid loan sharks and payday loans

Loan sharks should always be avoided – they’re illegal, not regulated by any financial organisations, and they generally charge massively high interest rates. What’s more, if you aren’t able to repay them you may be pressured into borrowing even more money, which could lead to a spiral of debt.

Payday loans may be legitimate, but they can come with incredibly high interest rates sometimes reaching over 1000% - which could make even a small loan turn into a debt spiral. Learn more with our guide to payday loans.

Don’t make too many applications

Every loan application you make, just like credit applications, leave a mark on your credit report. Too many of these will give lenders the impression that you are desperate to take out a loan, which could imply that you’re struggling to manage your finances – as a result, lenders may be more reluctant to let you borrow from them in the future.

Check your credit rating

Rather than making lots of applications and hoping one will stick, you may be better off running a soft check on your credit score to see what kinds of loans you’ll be eligible for. This way you can minimise your applications and reduce the chance of you damaging your credit.

Consider borrowing more

Often with loans, the more you borrow the less interest you’ll end up paying. It can vary by lenders, but you should always check on the interest rate they charge as there might be a chance you actually pay less overall by choosing a bigger loan with a lower interest rate.

Shop around

The best way to find the right deal on a loan is to shop around, and by comparing deals on MoneySuperMarket you’ll be able to browse a list tailored specifically for you. All you need to do is answer a few questions about the loan you need and you’ll be able to compare loans from a number of different providers by the rate you’ll pay back at as well as how likely you are to be accepted.

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