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 20 SEPTEMBER 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 around 50% APR. It’s unlikely you’ll find a guarantor loan with a low APR. 

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 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, 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. 

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:

  • 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. 

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. 

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 offering something of yours as collateral to secure the loan against. 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, but are therefore more expensive, generally speaking, for those with a bad credit history. 
  • 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

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

If your guarantor can’t keep up with the repayments when called upon, or change their mind and refuse 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. 

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. It could be used for an emergency such as a broken boiler, or for something like buying a new car, but, there’s nothing to stop you from using it for anything else. 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. Besides, 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?

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. 

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

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