Guarantor loans are designed to help someone who has no credit history (such as a young person) or a bad credit history to borrow money. In a guarantor loan, another person is agreeing to repay the debt and/or take up the monthly repayments in the event that the applicant cannot do so themselves. Guarantor loans are legally binding for both the borrower and the guarantor – hence they should never be entered lightly or without serious consideration.
To be a loan guarantor, you must be over 21 years of age and have a good credit history. In addition, the guarantor must have a separate bank account to the applicant and be of good financial standing. Often a guarantor will be a close relative, such as a parent, uncle, aunt or even grandparent, however, some lenders will also accept a spouse (although they must still adhere to the rule of having a separate bank account).
The main qualification for the guarantor is that they must be in a financial position to assume repayments if the guarantor defaults. Hence, they must be able to show that they meet this requirement before the loan is granted.
Typically, you’ll find that guarantor loans are not offered by the big, high street banks and building societies, but rather the smaller, specialist lenders. Many of the deals are provided by online-only providers, who normally charge a higher APR than you would see on an unsecured loan.
Guarantor loans can be used for the same purposes as an ordinary loan: buying a car, paying for a holiday, home improvements, etc. – even debt consolidation. As with any form of lending, you should avoid using a guarantor loan to pay for day-to-day expenses. It may be you need to review your finances, particularly if you might be overspending. Taking out a loan when you don’t have control of your finances is likely to compound the problem.
If you are struggling with debt, you could read our guide on 12 steps to get debt-free. In addition to this, you’ll find that both the Citizen’s Advice Bureau and Money Advice Service can offer impartial advice, support and helpful guidance.
This not only depends on your personal circumstances, current debts and credit history – as it does with an ordinary loan – but also those of your guarantor. The lender will want to be sure that both you and, more importantly, your guarantor can repay the loan.
The lender may offer you less than you have asked for if they still consider you a higher risk – even with a guarantor.
If a borrower is unable to make their repayments, then the lender has the right to demand these from the guarantor and could even seek full repayment of the loan. This applies even if the guarantor’s own circumstances have changed since the loan was originally obtained, for example loss of employment.
Being a loan guarantor is a serious and lasting commitment and should not be entered into lightly. As the name implies, a guarantor is guaranteeing to the lender that should the loan applicant be unable to make the repayments, or stops paying for any reason, they will pay in their place. Sometimes this can mean that the guarantor must repay the whole amount of the outstanding balance plus interest.
Therefore, you should never agree to be a guarantor unless you are in a financial position to make the repayments for the borrower and are willing to accept legal responsibility for the debt. If you found yourself unable to pay the debt then your own credit record would be negatively affected. Also consider the fact that, if you do have to pay this debt off for the borrower, this could impact your relationship with them personally.
Guarantor loans are usually more expensive because their interest rates are higher than a loan for someone with good credit. For example, a guarantor loan is often in excess of 30% APR, rising to nearer 50% APR for many products. Compare these with the typical rates of a secured loan available to those with a good credit history on our comparison charts, where these start from less than 5% APR.
Never agree to be a guarantor unless you are absolutely prepared to end up paying the loan back yourself.
Disclaimer: This information is intended solely to provide guidance and is not financial advice. Moneyfacts will not be liable for any loss arising from your use or reliance on this information. If you are in any doubt, Moneyfacts recommends you obtain independent financial advice.