Everything You Need to Know About Finding a Guarantor for your Loan
The flip-side of this is, if you do have any black marks on your credit history, many mainstream lenders may choose not to sell you the product you were after. It doesn’t take much - a couple of missed payments on your credit card, your mortgage or a previous personal loan, and suddenly you can find borrowing that much trickier.
A low credit rating doesn’t spell the end of you being able to borrow, however. One of the most common options is to seek what is known as a guarantor loan, with a third party standing as guarantor for your application.
The issue then is finding the right person who is prepared to back you and effectively stand sponsor for your loan. This guide is all about how to identify that person, how to approach them and how to convince them to help you.
Why do lenders ask for a guarantor?
If you have a poor credit score, lenders assume that you are at a greater risk of defaulting on your repayments. You may be in a perfectly sound financial position and have no problems whatsoever keeping up with the schedule. But all the lender knows is, at some point in the past, you have missed debt repayments, so they think it is possible you might do so again.
A guarantor, therefore, becomes the loan company’s insurance policy - they will lend to you if you have a patchy credit history, but only if that customer is backed by someone else who also accepts some responsibility for the debt.
What does a guarantor have to do?
In the most simple terms, should you default on your loan repayments, your guarantor will have to pay instead. They will have to agree to this in writing during the loan application stage, and their agreement is then legally binding. Asking someone to be your guarantor is, therefore, quite a big favour. That’s why it can sometimes be tricky to find someone who is prepared to take it on.
To become your guarantor, the person you nominate will have to agree to credit checks, provide evidence of their financial means such as bank statements and income details, and co-sign the loan agreement with you.
Who can be my guarantor?
Different companies offering guarantor loans have different eligibility rules for who they will accept as a guarantor. But in general terms most lenders will usually specify the following:
- Any guarantor must be aged between 18 and 75.
- They must have a good credit rating and be able to demonstrate they can afford to cover the loan repayments if required.
- Some lenders will only accept guarantors who own their own home; others don’t make this a hard and fast rule but nonetheless prefer it if guarantor applicants are homeowners. But don’t worry - the loan companies won’t be asking anyone to secure the loan against their property.
- Most lenders will NOT accept a partner or a spouse who lives at the same address as you and/or shares the same bank account.
Aside from the rule about partners and spouses, most loan companies are relaxed about the relationship between you and your guarantor. They can be a family member, a friend, a work colleague, an employer, a landlord - the main thing is that they agree to back your loan, including meeting repayments if you fail to do so.
I’m nervous about admitting my poor credit history
We hear from many people who don’t like the idea of a guarantor loan because it means revealing to friends or family that they have a poor credit rating. This is understandable as a lot of people like to keep their financial affairs private.
But if you need to borrow money and your credit history is proving to be an obstacle, it is a case of needs must. Having a guarantor for a loan is often the best means of keeping APRs down and repayments manageable when your credit history is not great. You could look at alternative options like no guarantor loans, short-term loans, credit cards and bank overdraft facilities, but these can come at a higher cost.
If you still need convincing, ask yourself this - is it better to ask a friend or relative to back a loan you can afford, or have to go cap in hand to them when you’re in real financial trouble because you’ve taken on a debt you can’t manage?
How should I approach someone about being my guarantor?
It is important to be realistic in your choice of guarantor. There is no point asking someone who you know couldn’t afford to pay your debt for you, who has a poor credit history themselves or you just don’t know well enough. Picking the right person is half the battle.
The main thing to remember is that asking someone to be your guarantor requires a considerable amount of trust. So be open and honest about what you want from them, and why. If they understand why it is you need the money, and why you need their help, they’re much more likely to go into it willingly than if you avoid their questions or come across as if you are hiding something.
Be practical as well. You’re asking your guarantor to cover your debt repayments if you become unable to meet them. The first thing they are likely to ask for is the reassurance that you will be able to keep up with your debt. Be prepared to disclose details of your financial circumstances and provide evidence that you can manage the debt. And offer a plan of action should something happen and you do default - how will you pay your guarantor if they do have to cover for you?
I still can’t find anyone suitable - what should I do?
There are circumstances where people simply can’t find someone to back their loan, and not through lack of trying. If you find yourself in this position, we understand it can be frustrating.
There are two basic options left open to you. One is to reconsider whether you need the loan at all. If you cannot get a standard personal loan because of your credit history and you can’t find a guarantor, the other borrowing options left open to you start to become expensive. Could you pull together the cash you need by cutting your outgoings and saving? Do you have things you could sell to raise the money? Would a friend or relative be more willing to lend you the cash than stand guarantor in a legal arrangement?
If you really do need to borrow, then your next option is to look at borrowing options where you need neither a good credit score nor a guarantor. The downside to this is the APRs start to shoot up, making borrowing expensive. Short-term or payday loans are popular and high profile, but they typically charge APRs at around 100% or higher. For anything other than small loans (counted in three figures) that you intend to pay back within a few months, these kinds of products can quickly become unmanageably expensive.
For larger sums of £1000 and over, with longer repayment periods, there are so-called no guarantor loans available at lower rates. These aren’t so common and still charge higher APRs than guarantor loans, but they do at least offer an option if you really cannot find anyone to back your borrowing.
Andrew joined Choose Wisely 5 years ago, originally working in a design capacity to make sure the website was simple to use. Most notably he worked with the Consumer Finance Association to design the comparison table of choice for High-Cost Short Term Finance products.