Guarantor Loans in the UK

As of 2018, over 150,000 people in the UK had a guarantor loan, and these figures are rapidly increasing. A guarantor loan allows you to borrow money with a poor credit history or a thin credit file. Read on as FamilyMoney explores everything you need to know about how guarantor loans work in the UK.

What is a guarantor on a loan?

A guarantor loan is a type of unsecured loan that requires a second person to take up the responsibility to pay off the debt in case the lender misses monthly repayments or cannot fully pay back a loan. Usually, a borrower would opt for this type of loan if they have little credit history or a bad credit score and are unable to take out any other kind of loan or credit.

Guarantor loans can better your credit score when you make timely payments

In the case of poor credit history, anyone would have difficulty getting approved for most types of loans. However, with a guarantor loan, there is less financial risk for the lender as there is someone else who can keep making the payments if the borrower is unable to. The typical loan amount with a guarantor loan is between £1,000 and £10,000.

Who can be a guarantor on a loan?

Anyone can act as a guarantor to a loan, so you may wish to ask your parents, a friend, relatives or a colleague to be your guarantor. However, there are eligibility criteria for one to be a guarantor. Importantly, you must ensure that your guarantor understands the risks involved – if you cannot make your repayments, they would have to pay back your loan.

Guarantor loan eligibility

These are the typical requirements that most lenders require to accept a person as a loan guarantor:

  1. Be a UK resident (homeowner or non-homeowner)
  2. Be aged between 21 years and 75 years at the start of the loan
  3. Hold a UK bank account & debit card
  4. Prove that you have a steady source of income – you may be asked for bank statements
  5. Be financially independent of the borrower
  6. Have a good credit history

How a UK guarantor loan works

A guarantor loan works like any other type of loan, with the notable difference being that a second person, acting as your guarantor, agrees to pay your debt in case you default on your repayments. This loan is often viewed as a last resort for those with a bad credit history, as they are typically limited in their credit options.

A handshake between a lender and a borrower for a guarantor loan

A guarantor loan can help build up your credit score if you stick to the repayment plan and make your payments on time. For guarantors, the most important thing to consider is whether they believe the borrower is trustworthy, as well as able and willing to make loan repayments on time, as they would otherwise risk-taking on their debt.

Are guarantor loans expensive?

As with most credit options, many factors determine the cost of a guarantor loan. Your employment status and credit score are the prominent aspects that would affect this; however, the typical APR for a guarantor loan is 50%. Whereas this may seem high, the interest rate is cheaper than many loans for people with a bad credit rating or payday loans. Always compare guarantor loans to get the best deal.

Additionally, with a guarantor loan, you could be borrowing more money than with many alternative credit options, such as payday loans with no guarantor, certain credit cards or pawnbroker loans. However, one crucial aspect to be aware of is additional and potentially hidden fees that lenders impose on those who take out guarantor loans. Make sure you are aware of the terms and conditions of your agreement so that you do not face unexpected expenses in the form of these hidden fees and charges. Always make sure to deal with lenders who are regulated by the Financial Conduct Authority and listed on the Financial services register to avoid unnecessary risks when borrowing money.

If you are finding it hard to find a guarantor to co-sign your loan, you may be interested in unsecured personal loans. Click here to find out everything you need to know about them.

Common questions about guarantor loans:

Do you need a guarantor for a student loan?

If you are a student who satisfies income criteria for two years, you do not need a guarantor for student loans. For students who have not had the chance to build up their credit score or had income, a guarantor may be necessary for them to be approved for a student loan. Check with your provider to make sure you have the best student loan options and the impacts on your credit score.

Does being a loan guarantor affect getting a mortgage?

Acting as a guarantor on a loan does not financially associate you with the person who takes out the loan. Therefore, being a guarantor is not something that appears on your credit file. However you should remember your responsibilities as a guarantor and if you should have to assume payments on the third party loan, this may affect your budget and your ability to repay your mortgage on time.

Can I be a guarantor on multiple loans?

Most lenders allow someone to act as a guarantor on a single loan at any one time. There is the financial risk that if a guarantor had to cover the repayments of two different borrowers who defaulted on their loan, that they would struggle financially and become unable to repay the loans. If you are considering becoming a guarantor on a loan you should carefully consider your financial position first and make sure you can afford the personal loan repayments.

What happens if the guarantor loan instalments aren’t paid?

When a loan instalment doesn’t come in on time, the lender will notify the borrower and the guarantor so that they are aware. If the lender can’t collect a payment from the borrower or a solution cannot be found, then the guarantor will be contacted to make the payment. If the guarantor cannot make the monthly payment or if they refuse to pay, the lender may take them to court for breaching their contract terms.

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