What are guarantor loans?
How guarantor loans work, the risks and alternatives
If you have a poor credit history and struggle to get a normal loan, you may be considering a guarantor loan. Before committing, it's worth understanding the risks, and figuring out if it's really the right option for you. This guide explains how guarantor loans work and what alternatives you should consider first.
What is a guarantor loan?
A guarantor loan is just like any other loan, with one key difference: when you apply you'll need to include someone else on the application to act as your 'guarantor'.
A guarantor is someone legally responsible for making any loan repayments if you're not able to. Usually it's a trusted family member, friend or maybe even work colleague who has a good credit history (it usually can't be your spouse or partner).
How do guarantor loans work?
Guarantor loans are similar to standard personal loans, and can be either unsecured or secured. If the loan is secured, you or your guarantor will have to put up a high value asset – usually a house – up as additional security for the loan.
When you apply for the loan, both you and your guarantor will have to supply your personal details, information about your income and savings and some form of photo ID, so you can both be credit checked.
If your application is accepted, the details of the loan including the interest rate, monthly repayments and loan term will be agreed upon. You'll be sent the loan as a lump sum to your bank account. In some cases, the lender will send the money to your guarantor, rather than directly to you, as a form of fraud prevention.
You and your guarantor will then BOTH be responsible for paying back the amount borrowed (plus interest) in monthly instalments. If you can't (or don't) pay in the first instance, your guarantor will be contacted – they will be legally required to make the payment on your behalf.
What should you consider before taking out a guarantor loan?
Taking out a guarantor loan isn't a decision to take lightly – particularly as it impacts not just your own financial situation, but that of your guarantor's too. Before you decide whether it's right for you, ask yourself the following questions.
1) Do you absolutely need to borrow the money?
Are you planning to use the loan for an essential purchase such as an emergency boiler fix or car repair? Or, could you wait until you've saved up to pay for it? Martin has a money mantra for when you're skint and you're considering buying something. Ask yourself these questions BEFORE you commit to borrowing.
2) Can you budget and reduce your outgoings?
If you're looking for a loan for a non-emergency purchase, do a money makeover first to see if you free up any cash immediately, then design an affordable budget (we have a template to get you started in our Budget planner guide).
3) If you still NEED to borrow, check if there's a cheaper way
If borrowing is your only option, check whether you're eligible for other types of borrowing before committing to a guarantor loan. For example, dipping into a 0% overdraft or getting a 0% purchase credit card or money transfer card are all examples of cheaper ways of accessing lump sums in emergencies – we go into more detail about potential alternatives below.
4) Can you afford the repayments?
Guarantor loans tend to be much more expensive than standard loans. Think carefully about whether you can comfortably make the repayments each month for the entire duration of the loan.
Not only will missing repayments impact your credit score, it could impact your relationship with your chosen guarantor and their financial position too.
What are the risks of getting a guarantor loan?
Before you even consider applying for a guarantor loans it's important both you and your potential guarantor understand the following risks:
- Guarantor loans are typically more expensive than normal loans – at around 50% APR. So, you'll end up repaying far more than you would if you borrowed the money in other ways (such as with a credit card or overdraft).
- You normally can't make overpayments if you come into some money and want to clear the loan quickly. Where you can make overpayments you'll often have to pay a fee to do so.
- If you or your guarantor can't make the repayments, your credit scores will be affected, and you'll both be at risk of further court action.
- If you've taken out a secured guarantor loan, your guarantor's home (or other high value asset) could be repossessed if you both fail to make the repayments.
- If you can't repay the loan, and it falls to your guarantor, consider how this could affect your relationship with them.
What are the benefits of a guarantor loan?
In our opinion, there are very few benefits to a guarantor loan. They are an expensive and risky form of borrowing. However, if you have a poor credit history, have been rejected from all other forms of borrowing and need a lump sum for an emergency, but can reasonably afford the repayments, there are some benefits:
- You're more likely to be accepted for a guarantor loan than a standard personal loan if you have a poor credit history.
- You're likely to be approved quickly – usually within 24 hours – so it's a quick way to access a lump sum.
- Making repayments in full and on time can help improve your credit rating.
What do you need to be eligible for a guarantor loan?
Different lenders may have different eligibility criteria. But generally, to apply for a guarantor loan you'll need to:
- Be over 18
- Be a UK resident
- Have a photo ID (such as a passport or driver's licence)
- Have a separate bank account to the guarantor
- Have a regular income, or proof of how you will make the repayments
The guarantor you choose will also have to meet certain eligibility criteria, including:
- Be aged 21 or over
- Be a UK resident
- Not have been declared bankrupt in the last six years
- Have a separate bank account to you
- Have a photo ID
- Have proof of enough income or savings to make any repayments if you can't
- Not be your spouse or partner
What are the alternatives to a guarantor loan?
A guarantor loan can be an expensive and risky way to borrow money. If you really need to borrow, see if one of the following options could work for you first:
- An overdraft. Many current accounts come with an arranged overdraft, which lets you withdraw an agreed amount of money that you don't currently have in your account. You'll usually have to pay a fee or interest on the amount you overdraw.
- Balance transfer card. Balance transfer cards are a way of making existing credit card debt cheaper by transferring debt from old credit or store cards to a new one with 0% interest for a set number of months. While you'll still owe the money, the debt will be cheaper to pay off. Full information on how these work, and the options available in our Balance transfers guide.
- Credit card. For small amounts, a credit card can be a cheaper way of borrowing money. While you may not qualify for the highest credit limits or longest 0% periods, there are a range of cards available that are designed for those with less than perfect credit scores. Full information on how these work and how to apply in our Credit cards for bad credit guide, or use our free credit card eligibility checker to see what you might qualify for.
- Money transfer card. A 0% money transfer card allows you to shift cash from a card to your bank account to clear your overdraft or give yourself a 0% cash loan for up to 12 months. See how likely you are to be accepted with our quick eligibility calculator.
- Credit union loans. A personal unsecured loan from a credit union, rather than a bank. These lenders work to support communities united by a common bond, such as location, or profession. Read more about credit unions.
- Community Development Finance Institution (CDFI) loans. Often for businesses, but sometimes options for individuals too. If a CDFI isn't able to help you, they'll often refer you to somewhere that can.
Clever ways to calculate your finances