Loans

How Guarantor Loans Work In The UK

A father agrees to be a guarantor for a personal loan for his son

For people with a poor credit score, or little credit history, guarantor loans may be the only way to borrow money. In this article, we examine:

  • What is a guarantor loan?
  • Who can be a guarantor on a loan?
  • How expensive are guarantor loans?
  • How to get a loan with no guarantor

What is a guarantor on a loan?

A guarantor loan is a type of unsecured loan which requires a second person to take up the responsibility to pay off the debt in case the lender misses payments or is unable to pay back a loan fully. Usually, a borrower would opt for this type of loan if they have little credit history or a bad credit score and is, therefore, 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 a poor credit history, anyone would have difficulty getting approved for most types of loans. However, with a guarantor loan, there is less of a financial risk for the lender as there someone else that can keep making the payments in case 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. Namely, they would have to be at least 18 years old (or 21, depending on the lender), in full-time employment, not be your spouse or someone that you share a banking account with. Importantly, you must ensure that your guarantor understands the risks involved – if you are unable to make your repayments, they would have to pay back your loan.

How a guarantor loan works and what can it help with

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 bad credit, 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 will to make loan repayments on time, as they would otherwise risk taking on their debt.

Are guarantor loans expensive?

As with most credit options, there is a multitude of factors that 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 bad credit loans or payday loans.

Additionally, with a guarantor loan, you could be borrowing more money than with many alternative credit options, such as payday loans or certain credit cards. One important aspect to be aware of, however, are 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 to avoid unnecessary risks when borrowing money.

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.

About the author

Pat Harding

Pat is a former UK high street bank employee of 25 years who writes amazing and helpful articles for familymoney.co.uk

Some of Pat's areas of expertise include household finance, travel and insurance, savings and loans, pensions and day to day money management.

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