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.

Anelda Knoesen
From the Money team
4
minute read
Do you know someone who could benefit from this article?
Posted 7 JANUARY 2021

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 is prepared to act as ‘security’ for the loan. This means 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 over 50% APR. It’s unlikely you’ll find a guarantor loan with a low APR.

What are the pros and cons of a guarantor loan?

Advantages:

  • 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:

  • 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 interest 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.

Who can act as a guarantor?

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

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.

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

  • between 21-75 years old
  • 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

Your guarantor doesn’t necessarily need to own a home of their own; they could be a tenant. However, if your guarantor is a homeowner in their own right or with a mortgage, it could mean your application is more likely to be successful. It could also mean you get a better interest rate.

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 an unsecured personal loan or a secured homeowner loan. To see which loans you’re most likely to be accepted for before you apply, use our loan eligibility checker.

How can I improve my credit score?

To help boost your credit rating, try not to use more than 30 per cent 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 can also improve your score.

Getting a credit building card can 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.

How can I find cheap guarantor loans?

Unfortunately, you can’t compare guarantor loans with Compare the Market. But you can use our eligibility checker to see which personal loans you’re likely to be accepted for without impacting your credit score.

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. 

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