Compare guarantor loans
A guarantor loan helps if you have a poor credit history or are struggling to get a loan
What is a guarantor loan?
The key difference between a guarantor loan and other types of loan is that you need a third party – typically a family member or friend – to “guarantee” to pay off the debt if you can’t. The mechanics of the loan are the same as with other types: you borrow money from a lender then pay it back in instalments, which include interest.
Guarantor loans are designed for those who may not be eligible for standard loans because they have a poor or no credit history. Lenders are more likely to grant this type of loan to those with bad credit because it reduces their risk – if the borrower defaults at any time on their repayments, the guarantor steps in to pay back the loan. This is the case even if the borrower is declared bankrupt.
Bear in mind that the interest on guarantor loans is often extremely high, typically with a representative APR of between 30% and 50%.
Debt charity StepChange warns that this means you could end up paying back more than double the amount you borrowed over the period of the loan.
Guarantor loans are designed for those who may not be eligible for standard loans.”
Can I get a guarantor loan?
To qualify for a guarantor loan, you typically need to be:
Age 18 or older
A UK resident, or have a UK bank account
Have a regular income
Able to demonstrate that you can pay back the loan
Some lenders also require you to
Have a minimum level of income
May also have a maximum age limit based on how old you will be when you finish paying back the loan.
Many lenders will also say
You cannot be subject to a current Individual voluntary arrangement (IVA) or bankruptcy order.
Who can be a guarantor?
A guarantor needs to be someone who is willing to support you and is:
Someone who knows you well
Aware of the responsibilities of a guarantor
Typically age 21 or older
Younger than 75 at the end of the loan term
In receipt of a regular income (a wage or pension)
A UK resident
A separate UK bank account and debit card holder from the loan applicant
A UK bank account and debit card holder
Able to afford the monthly payments if you can’t
Someone with a good credit record
Some loan providers have stricter rules and may also insist that your guarantor is:
A homeowner
Not your spouse
Receiving a certain level of income
Choosing your guarantor
You need to make sure that your chosen guarantor knows what responsibilities they are taking on, including having to step in and pay off your loan if you are unable to.
It’s advisable for any guarantor to take legal advice before signing a contract.
You should also let your guarantor know why you want the loan and how you plan to repay it.
Your lender will ask about your relationship with the guarantor. Lenders prefer someone close to you, like a family member or friend, because they believe that they are more likely to take their responsibility seriously and pay back the loan.
How to choose the best guarantor loan for you
Take the following steps to find the right guarantor loan to suit your needs...
Decide how much you want to borrow
Calculate what you can afford to pay monthly
Find your guarantor
Compare guarantor loans
Pros and cons
Pros
Cons
How much does a guarantor loan cost?
Since the lender is taking more risk by lending to a borrower with bad credit, interest rates are typically higher on guarantor loans than on regular personal loans.
The interest rate charged will depend on your specific circumstances and can vary significantly – usually between about 30% and 50% APR.
The interest rate also depends on your lender and can fluctuate over time. You can usually borrow for a period of between three months and five years, depending on the lender.
You can usually borrow between £500 and £12,500, perhaps more depending on your and the guarantor’s circumstances."
What happens if I want to be a guarantor?
Before agreeing to be someone’s guarantor, it’s vital to be fully aware of what’s involved and the potential repercussions. If you’re in doubt, seek legal advice. Here are a few useful tips:
Make a written contract
Write out a simple written contract with the borrower stating how you want to communicate, how often you want to receive updates, and in what circumstances they should get in contact with you.
Limit your liabilities
Ensure that the guarantee is limited to that specific loan and that the borrower cannot use your guarantee for other loans such as mortgages or credit card debt.
Keep all documentation
When agreeing to be a guarantor, you’ll receive a copy of the agreement, the borrower's repayment schedule and the guarantee contract. Make sure you keep all the documentation somewhere safe and create digital copies if necessary.
“It’s important that you and the guarantor are fully aware of the risks involved. Interest rates on these loans can also be quite high, and thus lead to further problems, so it's better to consider all other options before you opt for a guarantor loan.”
Alternatives to guarantor loans
Alternatives to guarantor loans
Credit union loans
Credit unions often offer smaller loans at lower interest rates than those designed for people with bad credit. Credit unions can, by law, only charge a maximum of 3% a month (42.6% APR) in England, Scotland and Wales and 1% in Northern Ireland (12.68% APR). They usually lend for up to five years if the loan is unsecured, and up to 10 years if the loan is secured, although some let you take out a secured loan for up to 35 years.
These loans can be helpful for people with bad credit and sometimes offer options to pay loans back weekly rather than monthly. However, you’ll have to be a member of a credit union for a certain period of time in order to apply for a loan and some require you to build up some savings beforehand.
Unsecured loans
Unsecured loans are loans that don't require an asset, such as a house or car, to be used as security. They’re usually more expensive than secured loans as they’re riskier for the lender.
Make sure you use an eligibility checker before applying for an unsecured loan. This lets you find out if you’re likely to be approved for the loan you’ve chosen so you don’t end up making multiple credit applications over a short period of time, which can negatively affect your credit score.
If you have bad credit, you may still be able to get a loan, but you'll usually pay a higher interest rate and be more limited in how much you can borrow.
Credit cards
Finally, credit cards are another borrowing option. Pick one with the lowest interest rate for borrowing that you can get. Some even offer 0% on purchases for a certain period of time when you first take them out. Although they revert to a relatively high interest rate at the end of this period.
If you have bad credit, you could opt for a credit-building credit card. This type of card has more lenient eligibility requirements. However, as with most bad credit borrowing, the interest rate is likely to be much higher than for regular credit cards, and credit limits will also be lower. If you use it responsibly, however, it can help to improve your credit score.
How can I manage my debt?
For those who are having trouble keeping up with debt payments, it's really important to seek help. The first step is to speak to your lenders and see if you can work out a manageable payment plan to reduce your debt.
If that doesn’t work, there are debt charities you can contact that offer free debt advice to help you get out of debt. For free debt advice contact StepChange, Citizens Advice or the National Debtline.
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