Loans With a Guarantor: What You Need to Know

Loans With a Guarantor: What You Need to Know

When traditional lenders say no, a guarantor loan may open the door to much-needed credit. But what exactly does it mean to have a guarantor, and is this option right for you? We clarify guarantor lending so you can borrow with greater confidence.

Who Should Consider a Guarantor Loan?

Guarantor loans are designed for those with limited or poor credit history, or anyone struggling to secure mainstream credit. If you’re a young adult, recently arrived in the UK, or have previous financial difficulties, this route could help. Guarantors are usually close friends or family willing to back your application.

Key Concepts and Terminology

Guarantor loan: An unsecured personal loan that requires a second person (the guarantor) to promise repayment if you default.

Guarantor: Someone—often a trusted friend or relative—who agrees to cover your repayments if you cannot. They need a strong credit record and typically proof of stable income.

Borrower: The individual receiving the loan. Their credit history may not meet normal lending criteria, but the guarantor’s backing reassures the lender.

APR (Annual Percentage Rate): The interest rate plus all fees, expressed as a yearly percentage. Guarantor loans often have higher APRs than standard loans, reflecting the perceived risk.

Unsecured loan: No collateral is needed. The lender relies on your and your guarantor’s contractual promise to repay.

Default: Failure to make scheduled repayments, triggering the guarantor’s duty to pay on your behalf.

Your Guarantor Loan Options

UK lenders offer a range of guarantor loans, generally from £1,000 to £15,000, with repayment terms of one to five years. Here’s what to expect:

• Online direct lenders: Many specialist companies provide quick application processes, sometimes with instant eligibility checks.

• Credit brokers: Firms like Kandoo help you compare multiple lenders, potentially securing better rates or terms.

• Traditional banks: Fewer high-street banks offer guarantor products than a decade ago, but some still support these arrangements.

Features can include:

• Fixed monthly repayments

• Early repayment options (though charges may apply)

• Support for poor credit applicants

Always compare APRs, fees, and terms before committing. Online calculators can give a snapshot of likely monthly costs.

Costs, Risks, and Impact

Guarantor loans typically carry higher APRs—often between 30% and 50%—than standard personal loans. This reflects the risk lenders take on. Key considerations include:

• Monthly repayments: Can be substantial, especially with higher interest rates.

• Total cost of borrowing: Over the loan term, you may pay back significantly more than you borrowed.

• Credit impact: Repaying on time can improve your credit score, while missing payments will harm both your credit and your guarantor’s.

• Relationship strain: If you default, your guarantor is legally obliged to pay. This can lead to personal tensions or financial hardship for them.

“Being a guarantor is a major responsibility. Consider the risks before agreeing,” says Citizens Advice.

Eligibility, Requirements, and Conditions

To qualify, you’ll typically need:

• UK residency and a UK bank account

• Age 18–75 (varies by lender)

• Proof of income (for both borrower and guarantor)

• Guarantor with good credit and financial stability

Some lenders prefer homeowners as guarantors, though tenants may be accepted. Both parties must pass affordability and ID checks.

Step-by-Step: How Guarantor Loans Work

1. Find a willing, eligible guarantor

2. Compare lenders and loan terms

3. Submit your joint application online

4. Both parties complete identity and affordability checks

5. Loan agreement is signed by both

6. Lender pays out funds (often to the guarantor first)

7. Borrower repays monthly as agreed

8. Guarantor steps in only if you default

Pros and Cons of Guarantor Loans

Advantages:

• Access to credit when mainstream lenders say no

• May improve your credit rating with successful repayment

• Fixed monthly payments aid budgeting

Disadvantages:

• Higher interest rates than standard loans

• Your guarantor’s finances and credit are at risk

• Potential relationship stress if repayments are missed

Carefully weigh the benefits against the risks, particularly for your guarantor.

Before You Decide: Key Considerations

Think openly with your prospective guarantor about the risks. Both parties should review:

• Can you realistically afford the repayments?

• Is your guarantor prepared and able to repay if needed?

• What impact would default have on your relationship?

• Are there alternative borrowing options?

It’s wise to seek impartial advice before proceeding. Citizens Advice or the MoneyHelper service can provide free, confidential guidance.

Alternatives to Guarantor Loans

If you’re not comfortable with the risks, consider:

• Credit builder credit cards: Lower limits but can help improve your credit profile over time.

• Secured loans: Using an asset as collateral may offer lower rates, but you risk losing the asset.

• Peer-to-peer lending: Some platforms cater to those with weaker credit, sometimes at more competitive rates.

• Credit unions: Community-based lenders often offer fairer rates and flexible terms for local members.

Compare all options before making a decision.

Frequently Asked Questions

1. Can a guarantor withdraw after the loan starts? No. Once signed, a guarantor is legally locked in for the full loan term.

2. Does being a guarantor affect your credit score? Not immediately. But if the borrower defaults and you don’t repay, your credit score will be harmed.

3. Can I get a guarantor loan with bad credit? Yes, that’s the main purpose. Lenders focus more on your guarantor’s creditworthiness.

4. Who can be a guarantor? Usually a close friend or family member with good credit and stable finances. Age and residency rules apply.

5. What happens if both borrower and guarantor can’t pay? The lender may take legal action, and both parties’ credit files will be affected.

6. Are there fees for early repayment? Some lenders charge early repayment penalties. Check the agreement before signing.

Next Steps

If you’re considering a guarantor loan, start by discussing the implications with your chosen guarantor. Shop around for the best terms, use loan calculators, and seek impartial advice if unsure. Responsible borrowing protects both your finances and your relationships.

Disclaimer

This article is for general information only and does not constitute financial advice. Always consult a qualified adviser or lender for guidance tailored to your circumstances. Loan terms and eligibility criteria vary by provider.