If you're unable to get a loan due to a poor credit history, you could ask a friend or family member to be a guarantor. A guarantor loan could help you borrow what you need, even if you are borrowing money for the first time.
What is a Guarantor Loan?
A guarantor loan is an unsecured loan, where someone else is responsible for making your repayments if you are unable to. For example, if you are unable to pay back your loan and your parent is the guarantor, they will have to pay your monthly repayments for you.
Guarantor loans are commonly taken out by people with a poor credit rating because lenders are reluctant to offer them a loan, without a guarantee that they will be paid back. Often, lenders will need the guarantor to be a homeowner or someone who can prove that they have enough wealth to cover the cost of the loan.
How do Guarantor Loans work?
If you wish to take out a guarantor loan, first you must find a guarantor. This could be a friend or family member who is able and willing to make payments for you if you are no longer able to meet your repayments.
Your guarantor cannot normally be someone who is connected to you financially, including partners and spouses. Typically your guarantor will be contacted within 48 hours after your first missed payment as a last resort.
Guarantor loans usually come with high interest rates. Because of this, it is important that you have a good relationship with your guarantor as a high level of responsibility will be placed on them.
Who Can Be Your Guarantor
You can ask someone who is not financially connected to you to be your guarantor, such as a friend, family member or work colleague. In addition, they must:
- Be 18 or older
- In employment full time
- Someone who is not your spouse
- Someone who does not share a bank account with you
What are Guarantor Loans Useful for?
Guarantor loans can be useful if you do not have a good credit history and wish to rebuild your credit score. This is because every time you make a monthly payment on time, you will get a good mark on your credit rating.
This will help make it more likely that you will be accepted for credit in the future. Such as, for a standard unsecured loan, mortgage or credit card, without having to use a guarantor.
Yet, this will only work if you make your loan repayments on time. If you fall behind, you could further damage your credit score.
It is good practice to check your credit rating before applying for a loan or credit card because if you are rejected your score could be damaged. The same can be said if you make many applications in a short space of time.
Are Guarantor Loans Expensive?
Guarantor loans can be expensive with the APR generally being around 50%. The rates vary between lenders and depend on your personal circumstances such as your credit rating and employment history.
This rate may appear to be high, yet it can be a cheaper option in comparison to some other forms of credit such as payday loans for example.
Here is a representative example taken from the website of a well-known guarantor lender:
The representative APR rate is 49.9% APR (variable) so if you borrow £4,000 over 36 months you will repay £195.16 per month and £7,025.76 in total.
It is important to consider that some lenders can charge large ‘up-front’ and arrangement fees. When applying for any loan, do your research and look for these hidden fees as they can end up being very expensive.
What to look out for with Guarantor Loans
It is important to ensure you have a good relationship with your guarantor when opting for a guarantor loan. You both need to understand the level of risk involved.
If you default on your payments, your guarantor will have to cover the rest of your total amount for the duration of the loan term. They could even lose their home if the loan has been secured against their property.
Try to borrow responsibly and keep your borrowing to as little as possible. While many loan companies will allow you to borrow a guarantor loan up to £10,000 a larger amount can put more of a financial burden on both yourself and your guarantor.
It is also vital to borrow from a loan company that is authorised and regulated by the Financial Conduct Authority (FCA).
FCA authorised and regulated lenders must have affordability checks in place to ensure they only allow you to borrow what you can afford to repay.
If you are struggling with existing debts, you should seek advice before considering another loan. Late repayment can cause you serious money problems. For help, go to Moneyhelper.org.uk.
Guarantor Loan Summary
Guarantor loans can help you to acquire credit if you have a poor credit history, by letting you use a guarantor to make repayments for you if you are no longer able to. The key things to consider are:
- Your guarantor can be a friend, family member or work colleague but they cannot be connected to you financially
- The guarantor is responsible for repaying your loan in the event that you cannot make repayments any more
- You can usually borrow up to £10,000 over 5 years
- The APR is generally around 50%
- Guarantor loans can be useful if you have a poor credit history
- It is important to choose a responsible lender who is authorised and regulated by the FCA.