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A guarantor loan lets you borrow money even if you have a poor credit score. But, you’ll need a guarantor to promise to repay the loan if you can’t.
- A guarantor loan is an unsecured loan where the guarantor agrees to cover the debt if the borrower can’t make the payments
- It can improve your credit score if you repay on time
- If you’re asked to be a guarantor, make sure you’re fully informed before agreeing
What is a guarantor loan?
A guarantor loan is a type of unsecured personal loan.
The key difference between a guarantor loan and other types of loan is that the borrower has the support of a second person — the guarantor.
The guarantor, typically a parent or close friend, acts as a back-up to the loan and agrees to cover the debt if you default on repayments.
This reduces the risk to the lender, so they may be happy to lend you the money when you’d be rejected otherwise.
Tenancy agreements and mortgages can also be guaranteed in the same way.
Who are guarantor loans for?
Guarantor loans are designed for:
- young people needing to borrow money
- people with little or no credit history
- borrowers with a poor credit history
- anyone else who would struggle to be accepted for a mainstream loan
Being rejected for a loan can make it harder to be accepted for credit in the future. So, when one lender says no, they often all do. TotallyMoney’s eligibility checker lets you know if you’ll be accepted — with no harm to your credit rating.
What can you use a guarantor loan for?
Guarantor loans can be used for the same purposes as other loans. For example:
- buying or repairing a car
- home improvements
- debt consolidation
How do guarantor loans work?
Guarantor loans work in a similar way to other unsecured loans. You borrow a sum of money and repay it, plus interest, in fixed monthly instalments for a set period of time.
Both the borrower and the guarantor will both sign the loan agreement.
Depending on the lender, the guarantor will sometimes receive the money into their bank account and then pass it to the borrower. This is to reduce the risk of fraud.
The borrower makes the repayments each month. If they default and can’t repay, the lender will contact the guarantor and ask them to step in and pay.
You should check your credit report before making an application for a guarantor loan
If you see any incorrect information, you can raise a dispute by selecting the ‘Raise a dispute’ option against the appropriate section of your credit report.
Who can be a guarantor?
Each lender has different criteria about who can be a guarantor, but you will usually need to:
- be over 21-years-old
- have a good credit record
- prove you can afford to pay back the loan if the borrower defaults
- have a full-time job
- own your home
- not be financially linked to the borrower
Typically a guarantor is a parent or other family member.
What happens if I default on payments?
If you take out a guarantor loan and default on payments, the lender will contact the guarantor and ask them to make the payments instead.
If the guarantor does not, or cannot, make the payment, it will have a negative impact on both the borrower’s and the guarantor’s credit files.
The guarantor is also legally responsible for the debt, so this could lead to further action.
What are the risks for the guarantor?
The big risk for a guarantor is that they might have to pay back the loan because the original borrower defaults on payments.
This applies even if the guarantor’s circumstances have changed since the loan was taken out. For example, if they lose their job or have become distant from the borrower.
So, the guarantor needs to be sure they can afford to repay the loan, and are happy to do so, if they are asked to.
If the guarantor is asked to pay the loan but can’t, it will affect their credit score and make it harder for them to get credit in the future.
Should you be a guarantor for a loan?
It’s important to think carefully before becoming a guarantor for someone else’s loan.
Here are a few things you should consider:
- What will the borrower use the money for?
- Why does the borrower need a guarantor?
- Can the borrower afford to make the loan payments each month?
- Can I trust the borrower to make loan payments each month?
- What is the loan repayment schedule and how much are the payments?
- Can I afford to make the loan payments if the borrower cannot?
- If I have to pay off the loan on behalf of the borrower, how will it affect my financial situation?
- If I have to pay off the borrower’s debt, will it affect my relationship with them?
It’s important to be fully informed about what it means to be a guarantor before going ahead. Make sure you read all the documents the guarantor loan company sends you, and ask if you have any questions.
What if the guarantor doesn't pay?
If a guarantor is asked to repay the loan but fails to do so, the lender could go after them for the money.
This could involve:
- debt collectors
- court action
Non-payment of the loan will also have a negative effect on the guarantor’s credit score.
Is a guarantor loan right for me?
Some other forms of credit might be much cheaper.
If you don’t make the payments on your guarantor loan, it may affect your relationship with the guarantor if they are then chased by the lender for the debt.
Make sure you do your research and check that a guarantor loan is right for you before borrowing any money.
You should check loan interest rates and terms from different lenders.
The longer you have to pay back your guarantor loan, the lower your monthly payments will be. But, a longer term means you’ll end up paying more interest overall.
What are my other options?
There are some alternatives to guarantor loans that may be worth considering. These include:
Bad credit loans
Bad credit loans are designed for people with a poor credit record, or who have little or no credit history.
These loans typically charge higher interest rates than other loans, and the amounts lent will normally be lower.
Taking out a bad credit loan and repaying it on time can help improve your credit score.
Credit building credit card
A credit building credit card is designed for people who have poor credit.
While a loan might allow you to borrow a larger amount, credit cards generally have lower limits which might mean that you have a better chance of being accepted.
If you make credit card repayments on time, you could have your credit limit increased.
Credit union loan
Credit unions are nonprofit and run by the members. The members are those who put money into the credit union.They offer small loans at low interest rates.
Credit unions can often lend to people with a poor credit history, although you sometimes need to have some money saved with the credit union first.
If you own your property and have equity in it, you may be able to get a secured loan.
The loan will be secured on your home which means it may be at risk of repossession if you don’t keep up with the repayments.
Pros and Cons of a guarantor loan
- lower interest rates than some other types of bad credit loans, such as payday loans
- can improve your credit history if you make repayments on time
- fixed monthly payments
- higher interest rates than some other types of unsecured lending
- your guarantor will have to repay your loan if you fail to do so
- non-payment will have a damaging impact on both the borrower’s and guarantor’s credit scores