The Complete Guide to Guarantor Loans

what-is-a-guarantor-loanYou may not have heard of Guarantor Loans as they are not as widely available as other loan products. Our essential need-to-know guide tells you what they are, who they are for and what to be aware of before taking one out.

What is a Guarantor Loan?

A guarantor loan is an unsecured loan where another person – called a guarantor – is responsible for paying off the debt if you fail to make the repayments. They are aimed at people who have a poor credit rating and who may have been refused other loan products in the past.

How much can you borrow?

Guarantor loans usually range from £1,000 to £10,000 and can be taken out for between 1 and 5 years, depending on the product and lender.

Who can borrow?

These loans are designed to attract people who have a poor credit rating and have been refused credit elsewhere. However, you may still be refused – it depends on how bad your credit history is.

You will also need to be over 18 and hold a UK bank account. You will be required to show the lender you can make the repayments (through financial documents, such as a payslip) and provide the personal details of your named guarantor.

Who can be a Guarantor?

A guarantor can be almost anyone, such as a friend, family member or work colleague. However, they cannot be a person who is financially linked to you, such as a spouse or business partner.

The guarantor will need to be over 21, have a good credit history and be a UK homeowner (in some cases, the guarantor does not have to be a property owner, but they must have a good credit history). The lender will also need to carry out credit checks on the guarantor, so they need to be prepared for this.

What about Interest?

The interest on guarantor loans can be very high – up to 60% APR, depending on your credit history and financial situation. As with other types of loan, you will paying interest on top of your monthly repayments.

So, if you borrow £5,000 with a 50% APR and a three-year repayment term, the amount you will pay back is £8,790.48.   

What Happens if I Default?

If you fail to make the repayments (default) then your guarantor will be required to cover the full loan amount and any additional fees within a specified time.

If both you and the guarantor fail to cover the loan, it will also affect your guarantor’s credit rating, in many cases stopping them from getting credit in the future.

As some loans are secured against the guarantor’s property, if you cannot make the payments and your guarantor is not able to cover you – they would risk having their house repossessed.

For Borrowers…

You may be desperate and have been refused credit elsewhere. But our advice is to think very carefully before taking out a guarantor loan. Ask yourself:

  • Do you really need the loan? Or do you just want it?
  • Can you make the repayments? If there’s any question over this – don’t do it.
  • Can you handle your debt being someone else’s responsibility if you can’t make the repayments?
  • How would the debt affect your guarantor’s life if you default and they are saddled with your debt?

Remember, your guarantor may be a loved one, friend or someone you work with. Defaulting on your payments and transferring the debt to them could sour your relationship – causing huge amounts of stress for both parties. You can read more about how borrowing money from family and friends can affect relationships.

If you do go ahead, make sure you are totally clued up on the terms of loan and how much your guarantor will need to repay if you default.

For Guarantors….

If someone you know has asked you to be a guarantor, you should think carefully about your own situation before agreeing. Remember, if they default on the payments – the debt will become your responsibility.

And, as a guarantor you have no direct control over the borrower’s loan repayments, you just need to trust they will make the payments.

If you decide to go ahead, make sure:

  • You are happy that the borrower can make the payments on time and in full. They will need to clearly discuss their financial situation with you. Do they have a job for instance? Have they defaulted on payments in the past? Think twice if the borrower has a dodgy history of defaulting on loans.
  • You think carefully about the security you are willing to use against the loan. Whatever you secure against the loan (for example, your house) this can be taken from you should the borrower default and you are unable to cover the payments.
  • You get the full loan documentation complete with terms and conditions. Read through these in full.
  • You get everything in writing – get a contract drawn up between you and the borrower, including how much the payments are and when the borrower will make them.

Where to find Guarantor Loans

For those of us who have poor credit, a little help from a friend or family member in the form of a guarantor loan can be a good option.

If you stick to the loan agreement and never miss a payment, paying off the loan can even help improve your credit rating in the future.  However, if you default on the loan you could ruin your relationship with the guarantor forever.

It’s a lot to weigh up. If you do decide to take one out, you should compare loan deals in detail before approaching a potential guarantor.

You can use comparison tools at trusted sites such as Readies. Or you can use Experian’s CreditMatcher which can help find the right loan – not just guarantor loans – for your personal credit rating.

Remember – taking out a high interest loan is risky and can lead to more debt. You need to be completely confident that you will be able to make the repayments in full and on time. If you are in a difficult position financially, help is out there.

Contact the Citizens Advice Bureau or Step Change debt charity before jumping into more debt – they may be able to offer you alternative solutions to your situation.

This post is part of our Debt Management Series, you can read all the post in the series here.

Your Turn 

have you taken out a guarantor loan? How did it work out? Was it difficult to find a guarantor? Share with us here we’d love to hear your comments.

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