Guarantor loans

If you’re having trouble getting approval for a personal loan because of a bad credit profile or lack of credit history, a guarantor loan could be an option. 

But you’ll need to find someone who will financially back you and guarantee that the loan will be paid.

If you’re having trouble getting approval for a personal loan because of a bad credit profile or lack of credit history, a guarantor loan could be an option. 

But you’ll need to find someone who will financially back you and guarantee that the loan will be paid.

Alex Hasty
Insurance and finance expert
7
minute read
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Last Updated 8 JULY 2022

What is a guarantor loan?

A guarantor loan is a type of unsecured personal loan. It’s guaranteed by someone who promises to honour the debt and take over repayments if the borrower isn’t able to pay back the loan. 

The main reason people take out a guarantor loan is because they have either a bad credit rating or no credit history and have been refused a personal loan. Guarantor loans are typically used as a last resort for borrowing money. 

If you apply for a guarantor loan, you’ll need to find someone with a good credit rating – usually a friend or family member – who’s prepared to act as ‘security’ for the loan. This means that they take over financial responsibility for the debt and finish paying it off if you’re unable to. 

Interest rates on a guarantor loan are usually higher than a standard personal loan – and can be around 50% APR if you have bad credit and you and your guarantor are not homeowners. It’s unlikely that you’ll find a guarantor loan with a low APR.

How do guarantor loans work? 

Guarantor loans work in the same way as a personal loan. You borrow money from a lender, then pay back what you owe, plus interest, in monthly instalments. The only difference is that you’ll have someone who offers financial backing and is prepared to take over responsibility of repayments if you can’t.

When you apply for this type of loan, the lender will want verification of your guarantor’s ID. As well as your own credit file, the lender will also carry out a credit check on the guarantor to assess how responsible they are with their own finances, and to make sure that they’re able to support your loan. 

In some cases, depending on the lender, it will be the guarantor who initially receives the loan amount. They will then have a ‘cooling-off’ period – usually around 14 days – when they can decide to give you the money or return it to the lender. If your guarantor is happy to proceed, you’ll receive the loan amount, and start making your monthly repayments according to the terms of the loan.

Who can apply for a guarantor loan?

Anyone over 18 and who holds a UK bank account can apply for a guarantor loan. However, to have a chance of being accepted, you’ll need to prove that you have a plan to make your repayments. This includes proving you’re employed or have another source of regular income. You’ll also need to have someone willing to act as your guarantor, who can handle the responsibility that comes with it.

Who can act as a guarantor?

You should ask someone you know well to be your guarantor, ideally a close friend or a family member who isn’t financially connected to you. 

However, a guarantor isn’t simply ‘vouching’ for you or offering a reference. The guarantor needs to understand that they will take full responsibility for paying off the loan if you can’t pay it back. They’ll also need to sign a legally binding contract as part of the loan agreement. 

Criteria varies between lenders, but they will usually insist that your guarantor meets the following requirements:

  • Between 21-75 years old
  • Is a UK resident
  • Has a UK bank account
  • Has a regular income
  • Is not your spouse or civil partner
  • Does not have any shared financial accounts with you
  • Has a good credit rating and can afford to make the repayments if you default
  • Has not been declared bankrupt in the past six years.

Does my guarantor need to be a homeowner? 

Your guarantor doesn’t necessarily need to own a home of their own – they could be a tenant. Now that renting makes up such a large portion of the housing market, some lenders are happy to offer tenant guarantor loans. A tenant guarantor may need to pass additional security checks, though, to confirm their identity and financial stability. 

However, if your guarantor is a homeowner in their own right or with a mortgage, it could mean that your application is more likely to be successful. It could also mean you get a better interest rate.

How much do guarantor loans cost? 

Guarantor loans are normally more expensive than other types of personal loans or credit cards, because they’re usually taken out by people with bad credit. Even though the guarantor is there to mitigate some of the risk, lenders want to make sure that the risk is worth it. That’s why you can expect to find much higher APRs when comparing guarantor loans, sometimes as high as 50%.

What are the pros and cons of a guarantor loan? 

Advantages of a guarantor loan:

  • An option for those with a bad credit rating or no credit history.
  • Many guarantor loans are delivered within 24 hours.
  • If managed carefully, a guarantor loan could help improve your credit score.

Disadvantages of a guarantor loan

  • It’s a big financial commitment for both you and your guarantor.
  • You’ll need to be totally transparent with your guarantor about your financial situation.
  • You’re unlikely to find a low APR guarantor loan – interest rates are higher than a standard personal loan.
  • If your guarantor has to step in, it could negatively impact your credit rating even further.

How can I find cheap guarantor loans?

Although you can’t compare guarantor loans with Compare the Market, you can use our eligibility checker to see which personal loans you’re likely to be accepted for. It’s a soft search and won’t affect your credit score in any way.

Find out if you’re eligible for a loan

Compare the Market Limited acts as a credit broker, not a lender. To apply you must be a UK resident and aged 18 or over. Credit is subject to status and eligibility. 

Is a guarantor loan right for me? 

As with any loan, a guarantor loan needs careful consideration, maybe even more so, as you’re not the only party involved. You need to be confident that you can keep up with the repayments without your guarantor having to step in. Remember, their intervention should be seen as a last resort. 

You should also consider more than just the financial implications. If you have problems paying off your debt, it could put a strain on your personal relationships. 

Before deciding whether a guarantor loan is the best option for you, it’s worth looking at the alternatives to see what you might be eligible for.

What are the alternatives to a guarantor loan?

A guarantor loan isn’t your only option if you have a bad credit history. You may be eligible for some of these alternatives: 

  • Secured loans – these involve putting up an asset like your car or home as security against the loan. With this collateral, you can often access higher borrowing amounts or secure a loan when you wouldn’t normally be eligible. 
  • Unsecured loans – these don’t require any collateral so could be more expensive for those with a bad credit history. If you’re accepted for this type of loan, you should expect to pay a higher APR.
  • Credit union loans – an alternative to the traditional banks, credit unions are non-profit, which means they tend to offer lower interest rates. However, they won’t be willing to lend you large amounts. 
  • Peer-to-peer loans – this involves borrowing money from other people, rather than a bank or credit union.  
  • Credit cards – these may have lower limits than the amount you could borrow with a guarantor loan, but they can offer much lower interest rates (including 0%). 

To see which loans you’re most likely to be accepted for before you apply, use our loan eligibility checker

Frequently asked questions

How much can I borrow with a guarantor loan?

The amount you’ll be able to borrow very much depends on the current circumstances and credit history of both you and your guarantor. If lenders still see you as a high risk – even with a guarantor – they might not be willing to lend you as much as you’d hoped for.

What happens if my guarantor can’t make my repayments?

If your guarantor can’t keep up with the repayments when called upon or changes their mind and refuses to help, they’ll be breaching the terms of your loan agreement. This means they could face penalty fees, have assets repossessed or even be taken to court. If you’re asking someone to act as your guarantor or you’ve been asked to be act as a guarantor for someone else, you need to fully understand what this means for you both.

Will a guarantor loan affect my credit score?

If you can keep up with your repayments, paying back your loan on time every month could eventually help improve your credit score. 

However, if you have problems with your repayments and your guarantor has to step in, it could damage your credit score even more.

How does being a guarantor affect my credit score?

If you’re acting as a guarantor for someone else’s loan, your credit score could be affected. If the person taking out the loan manages to repay their loan themselves, you won’t be called upon and so your credit score will remain unaffected. If you are called on to help with repaying the loan, keeping up with those repayments on their behalf could see your credit score improve. If you can’t keep up with the repayments either, then you’ll almost certainly see your credit score fall.

What can a guarantor loan be used for?

A guarantor loan can be used for anything you’d like – for example, a broken boiler or other home emergency, or for something like buying a new car or even funding a wedding. On the other hand, you should be very careful when taking out a guarantor loan and use it for the right reasons. Guarantor loans are usually much more expensive than other types of loan, so you shouldn’t take one out for something unless it’s necessary. For example, if you’re wanting a guarantor loan just to go on holiday, you might struggle to find a willing guarantor to take on all that responsibility.

What happens if I can’t make repayments?

If you can’t keep up with your repayments, the responsibility for the debt passes to your guarantor, who must make the repayments for you. If you think you’re in danger of being unable to meet your monthly payments yourself, it’s important that you speak to both your lender and guarantor. The sooner you do this, the sooner you can come to an arrangement and your guarantor has time to prepare.

How can I improve my credit score?

To help boost your credit rating, try not to use more than 30% of your available credit. Keep your credit card balances low and aim to pay off any excessive card debt. Registering for the electoral roll and staying on top of your household bills could also improve your score. 

Getting a credit building card could also help. These cards are specifically designed for people who might not be accepted for standard credit cards. The idea is that you use the card responsibly, showing you can manage money in a sensible way and so building up your credit score. 

If you’d like to check your credit score, we’ve partnered with Experian to offer a credit report tool in our app. Find out more about getting a free credit check.

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