A guarantor loan is a loan that’s guaranteed by a friend or family member – the guarantor in question. They are the one responsible for repayment if you can’t pay the money back yourself, meaning they have to prove they have the sufficient funding or assets to cover the loan amount.
This type of unsecured loan is often favoured by people looking to borrow money for the first time, or those with a low credit score, as lenders focus on the financial history and credit score of the guarantor rather than the borrower.
Who can be a guarantor?
You can ask just about anyone to be your loan guarantor, but they must adhere to certain conditions to give prospective lenders peace of mind that they’re trustworthy. Some lenders set stricter requirements than others, but these often include:
- Being over a certain age (typically 18 or 21)
- Being a homeowner
- Not being financially linked to the borrower (e.g. a partner would be exempt)
- Having a strong credit record
If you know someone who adheres to some or all of the guarantor criteria, you’re well on your way to borrowing the money you need.
Is a guarantor loan right for you?
Guarantor loans are often more expensive than other types of unsecured borrowing, as they fall under the umbrella of bad credit loans – with lenders generally requiring additional security before they’re willing to approve a loan. As a result, APR rates are typically higher than that of alternatives (it’s not uncommon for APR on guarantor loans to be around 50%), making a guarantor loan generally more expensive than available alternatives. Remember: lenders only have to give the labelled ‘representative’ APR to 51% of borrowers, so, depending on your circumstances, you may be charged more for your loan.
This is, however, balanced by the fact that finding the right guarantor means you’re far more likely to be accepted for a loan. With multiple loan applications within a short time window hindering your credit report, increasing the likelihood of being approved for borrowing is of huge benefit – especially considering that successful repayments will help to improve your credit score. Typically, you can borrow between £1,000 and £15,000, with a payback term of anywhere between 12 and 60 months (generally speaking).
Dominic takes out a guarantor loan of £12,000 with a repayment window of 3 years at 20.9% APR. This means, given he makes all his repayments on time, he’ll pay a monthly fee of £440.66. In total, he’ll pay £15,863.86 – meaning his guarantor loan cost him £3,863.86.
All loans carry some level of risk when they’re taken out. Your circumstances could change, meaning the repayments become more difficult to keep up with. This could lead to damage to your credit rating if you miss payments or default on the loan, and leave active participants subject to legal action in order to reclaim the money.
This is one of the primary risks that come with guarantor loans – the guarantor themselves is equally liable for the loan repayments if the borrower gets into trouble and defaults. They are usually contacted within 48 hours of a failed repayment, with their own credit score negatively impacted in the event that they’re unable to make the borrower’s repayments. This, of course, puts a lot of moral and financial pressure on both the lender and guarantor. Potential guarantors should therefore ensure they’re confident in the borrower’s repayment ability, asking for evidence of income source where necessary.
How to apply
Different loan providers will offer different rates and amounts, so be sure to spend time considering which provider is best for your financial situation based on the repayment time and APR offered. Once you’ve chosen a lender, you’ll need to apply by providing your personal details, as well as those of your guarantor – so ensure you have these on hand to speed up the process.
Loans are typically paid out within 48 hours of your application being approved, but there are numerous factors that can slow this process. These include:
- Your guarantor not being contactable
- You or your guarantor living in Ireland or Scotland
- Applying for your loan over the weekend
Your loan provider will then usually pay out into your guarantor’s bank account to ensure your guarantor is acting on your behalf. Be wary of hidden costs, as these aren’t uncommon but do vary from one lender to the next. From initial application fees to early repayment fees, be sure you’ve thoroughly researched your lender to avoid any unwelcome surprises. To minimise risk, always use a reputable lender approved by the Financial Conduct Authority.
There are a number of alternatives to guarantor loans out there, many of which are particularly suited to bad credit holders. Visit our page detailing the various types of bad credit loan, if you’d like to find out more about the finance options available to you – and don’t forget to check in on our blog, too, for the latest personal finance tips, budgeting advice and more.
If you find yourself in need of personal assistance with your finances, we recommend visiting the Citizens Advice website here. Alternatively, you can call the free national debt helpline on 0808 808 4000.