What is a guarantor loan – should you take one out?

17 min Read Published: 24 Feb 2021

What is a guarantor loanA guarantor loan is a type of loan where a third-party - usually a family member - agrees to take responsibility for the debt if the loan applicant doesn't make the repayments. It allows people who have previously struggled to secure a loan, perhaps because of bad credit history, to access borrowing. However, while it is a good option for many people, there are some risks involved for both the loan applicant and the guarantor.

In this article we look at exactly how guarantor loans work, what the advantages are for this type of product, what the dangers are and explore alternative options.

How does a guarantor loan work?

If someone has impaired credit because of previous missed payments, defaults, CCJs or bankruptcy it can be difficult to secure borrowing in the future. Similarly, if someone has very little credit history because they haven't entered into credit agreements in the past, they can also find it difficult to get accepted for a loan. Guarantor loan products are designed to help this group of people to take out a loan by getting somebody else with a stronger credit history to guarantee they will take on the loan if the applicant doesn't pay it off.

It is possible to get guarantor personal loans, guarantor mortgages and guarantor car finance, although you will pay a premium for these products. Indeed, the high costs are one of the drawbacks of guarantor loans, as we will go on to look at later in this article.

As with all financial products, it is vitally important to read the terms and conditions of a guarantor loan carefully, whether you are the main loan applicant or the person acting as a guarantor. Moreover, there needs to be an open and frank conversation between the applicant and the guarantor about the expectations surrounding the loan agreement, discussing what would happen in a worst case scenario if the applicant can't afford to continue to service the loan.

Who can act as a guarantor for a loan?

Most people can theoretically act as a guarantor for a loan, as long as they are over the age of 21 (a handful of lenders will accept guarantors who are over 18), have a good credit history and have sufficient income to be able to make the monthly repayments if the original applicant can't. However, in reality, it is more likely that a family member or close friend would be prepared to take on the responsibility of acting as a guarantor because of the nature of the commitment.

Most lenders put an age cap of 75 for the guarantor at the time the loan is taken out, which may place restrictions on some grandparents being able to take on the role. There is also usually a restriction on the guarantor having any existing joint financial commitments with the loan applicant, including having a joint bank account or mortgage, for example. This means, in most cases, a spouse or partner won't be able to act as a guarantor.

In terms of assessing whether someone would make a good guarantor, these factors need to be taken into consideration:

  • Do they meet the basic eligibility requirements? Are they within the age bracket, have a sufficiently strong credit history and have the means to take on the loan if necessary?
  • Are they willing to commit for the lifetime of the loan? Agreeing to act as a guarantor on a loan is legally binding and you can't change your mind later down the line. A prospective guarantor has to accept they will be tied to that loan for the lifetime of the product, which could be several years.
  • Are they in a strong enough financial position to be able to comfortably pay the debt if required? If there are any potential changes in circumstances on the horizon for the guarantor - perhaps uncertainty around employment, problems in their relationship or other financial commitments - both the applicant and the guarantor need to carefully consider whether they are well-placed to take on the role.
  • Do they have an open and honest relationship with the loan applicant? The key to success with a guarantor loan is that both parties set out their expectations at the beginning of the agreement and maintain good dialogue, particularly if the loan applicant runs into difficulties with making the repayments. There is a real risk with this type of financial product that it can easily lead to arguments and rifts, particularly if one or both parties feel they have been misled.
  • Are they going into the agreement willingly? While the guarantor hopefully isn't being strong-armed into taking out the loan, it's wise to evaluate whether there are more subtle pressures being put on them to go along with the plan. Again, making sure there is good communication is vital, as well as evaluating whether there are alternatives to taking out a guarantor loan that may work better.

Am I likely to be accepted for a guarantor loan?

When you apply for a guarantor loan the lender will assess not only the credit-worthiness of the loan applicant but also of the guarantor. The nature of the product is that the loan applicant may have little or no credit history. However, they will have to demonstrate they can afford to make the repayments. The guarantor meanwhile, will have to have a strong credit record as a way of proving they will take on the burden of the debt if the applicant doesn't pay it back.

In addition, to be eligible for a guarantor loan, the loan applicant has to:

  • Be over 18
  • Have a UK bank account
  • Have sufficient income to be able to meet the monthly repayments

Meanwhile, the guarantor has to:

  • Be over 21 (18 for some lenders)
  • Have a UK bank account
  • Have a good credit rating, with no history of missed payments or defaults

Some lenders and comparison sites have tools that can check your eligibility and these will give you a good idea of whether you are likely to be accepted for a loan without it leaving a footprint on your credit report. It's a good idea to use these, where available, as being turned down for a loan is detrimental to your credit rating and could impact your ability to enter into other credit agreements.

How much does a guarantor loan cost?

The amount you pay for a guarantor loan will be determined by how much you borrow and over what time period. Generally, though, they have higher APRs than standard loans because of the fact the applicant tends to have impaired credit, which opens the lender up to a greater level of risk although, arguably, this is offset by the addition of a guarantor.

With loans generally between £1,000-£10,000, the interest rate can be as high as 50% APR. This means you can end up paying a staggering amount in interest over the life of the loan compared with the original loan amount. In the table below you can see the repayments you will pay on loans of £1,000, £5,000 and £10,000 over three years at different levels of APR.

Repayments on £1,000 guarantor loan over 36 months

APR Monthly repayment Total interest
Total to pay back
20% £36.34 £308.24 £1,308.24
30% £40.57 £460.52 £1,460.52
50% £48.84 £758.24 £1,758.24

Repayments on £5,000 guarantor loan over 36 months

APR Monthly repayment Total interest
Total to pay back
20% £181.69 £1,540.84 £6,504.84
30% £202.85 £2,302.60 £7,302.60
50% £244.18 £3,790.48 £8,790.48

Repayments on £10,000 guarantor loan over 36 months

APR Monthly repayment Total interest
Total to pay back
20% £363.39 £3,082.04 £13,082.04
30% £405.71 £4,605.56 £14,605.56
50% £488.36 £7,581.96 £17,581.96

 

The figures above highlight the significance of taking on a loan with a higher APR and show it is something to consider very carefully in advance. Paying over £7,500 in interest on a £10,000 loan is far from ideal and making sure you can comfortably afford to make the repayments month-in, month-out is even more important because, if you can't, your guarantor is obligated to take on the debt.

Step-by-step: How to apply for a guarantor loan

Once you have decided to go ahead with a guarantor loan and have discussed it in detail with the person who will be acting as your guarantor, there are a number of steps you will need to go through:

Step one: Work out how much you need to borrow and over what period

The rule of thumb is to borrow the smallest amount possible and pay it off over the shortest period of time. This means you won't end up accruing as much interest, which is all-the-more important with guarantor loans, where the APR is likely to be considerably higher than for other products.

Step two: Find the best guarantor loan for you

Shop around to find the loan with the most favourable terms. In advance of this, it is worth checking your credit rating - and that of your guarantor - with one or more of the credit agencies: Equifax, TransUnion and Experian. This will give you insight into the loans you are likely to be accepted for based on your specific circumstances. As discussed above, it is also a good idea to use an eligibility checking tool if they are available, as this confirms the likelihood of you being accepted without anything appearing on your credit file.

Step three: Complete the application

When you have identified the loan you want to apply for, the application process is much the same as for other types of personal loan, except for the fact that both the loan applicant and guarantor have to provide their details to the lender. This will typically include:

  • Personal details, including full name and date of birth
  • Current address and previous addresses
  • Employment status and household income
  • Existing financial commitments and monthly expenditure
  • Bank details for a UK bank account

The lender will check your credit history with one or more of the credit agencies and assess the other criteria, including the affordability of the loan.

Step four: Receive the money and set up repayments

If you are successful, the lender will typically pay the money into your account within 48 hours. Some lenders will initially transfer the money to the guarantor to facilitate a 48-hour "cooling-off" period, during which time the guarantor can change their mind. Once the loan has been approved, it is imperative you set up the monthly repayments to ensure you aren't late making payments.

What happens if I miss a payment on my guarantor loan?

If there is a chance you won't be able to make your monthly repayment, you should contact the lender as soon as possible to let them know and to see if they can offer any extra help. If you fail to inform the lender, they will often automatically approach the guarantor to make the payment.

If the loan applicant persistently misses payments, it will damage their credit record. However, the guarantor shoulders greater risk as they take on the responsibility of the loan and, if they can't make the payments, their credit record will also be damaged and they can face further action, including intervention by a debt collection agency.

What are the advantages of guarantor loans?

  • Guarantor loans can provide those with little or poor credit history the chance to secure a loan
  • You may have the option to borrow more money than with other types of loans
  • You can build up your credit score if you keep up with your repayments
  • The money is typically paid to the applicant quickly - perhaps within 48 hours - which can be helpful if the money is needed urgently

What are the disadvantages of guarantor loans?

  • The APR is high when compared to a standard loan and you will pay a significant amount in interest over the lifetime of the loan
  • There is a risk the relationship between the applicant and the guarantor could be damaged if the loan isn't paid back as agreed
  • As a guarantor, you risk damaging your previously strong credit record and bearing the burden of a potentially expensive loan if the original applicant doesn't keep up with repayments

Alternatives to guarantor loans

As guarantor loans involve getting a third-party to take on responsibility for the debt, it is worth considering if there are other options available to you. In the first instance, look at whether you need to take out the loan in the first place and, if you do, whether you can seek to reduce the amount you borrow to make the debt more serviceable. If possible, it is always better to try to save money to fund expenditure rather than taking on unnecessary debt.

If borrowing money is unavoidable, consider other personal loans that don't require a guarantor. Even with poor credit, there are a number of lenders who are positioned to provide you with a loan, albeit at an elevated cost. Similarly, you may be able to use a credit card designed for those with poor credit history, depending on how much money you need. With both of these options, you need to ensure you are responsible with making the repayments to avoid getting into unmanageable debt.

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