What are guarantor loans?
Guarantor loans are a form of personal finance that allow people to typically borrow amounts between £500 and £15,000. Repayments can usually be made over 12 to 60 monthly instalments. The exact terms will vary from lender to lender and depend on your personal situation. If you successfully meet you repayments some lenders may also offer a top up loan service part way through your term.
This type of finance is typically used by those with poor credit or a thin credit file (meaning little to no evidence of prior borrowing). Those who are facing difficult financial circumstances can more readily access funds on the condition that someone with past cases of responsible lending is happy to make the commitment of meeting any repayments the borrower can't. This is a different setup to taking out a joint loan.
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How do guarantor loans work?
The main feature of guarantor loans are typical APRs of around 39 - 50% representative. As mentioned above the service of these products is offered on the basis of 2 parts to the application being presented. The first is the part of the borrower and the second being the guarantor’s. The information of the two parties is linked and the guarantor portion of the application is called upon to support the borrowers. Lenders charge the guarantor the monthly repayable amount should the borrower not keep up their payments.
Any prospective guarantor will be asked to sign a Guarantee and Indemnity subject to the consumer credit act 1974. This needs to be signed to confirm they have read through all legal information and agree to accept responsibility for payments on behalf of the borrower should the eventuality arise.
The lender will run an individual affordability assessment on both parties. This is done in addition to an initial soft credit check. A lender will more often than not conduct a hard credit check before they give a response with their final decision. They do this as part of their obligation to the regulator to demonstrate responsible lending policies. They won't lend to a customer if they can't guarantee repayments will be met each month. This could be due to higher outgoings than wages, or if there is not a reasonable amount of monthly expenditure left over to cover the cost of the loan as well as an unexpected emergency.
Payments are collected using an automated process known as continuous payment authority. This tokenises your debit card upon approval and simply collects the agreed amount every month on the scheduled pay date. You do not need to call up your lender’s office each month or make a manual repayment through your online banking, as this is all arranged by the lender.
How to get a loan with a guarantor?
The most successful guarantors are normally related to you. Examples of good candidates to support your application are parents, spouses, a sibling,
One of the main factors to improve the chance of getting your loan funded is having a guarantor with positive attributes – this means someone with a good credit rating, who is employed and earning a stable income. Ideally, they would own a property in the UK. This is based on the premise that if a guarantor has a mortgage, they have likely demonstrated their creditworthiness in the past and will be easier to contact.
Guarantor loans companies will also consider those that are not a homeowner such as tenants and living with friends or parents, however, the rate charged may be a little higher.
Here's our quick checklist for your guarantor search:
- Have you spoken to people you're related to?
- Have you approached close friends?
- Have you considered friends that you've worked with?
There are significant risks to your credit score and financial future should you not be able to answer yes to all of the points above so make sure you carefully consider your decision to become someone's guarantor to avoid entering into an unfortunate situation where unexpected financial problems could arise.
What are the alternatives?
Whilst you may hear some people talk about products like peer to peer loans, low-interest guarantor loans or guarantor loans for bad credit, for example, they're really just different types of terms for guarantor loans. If you can't find someone to support your application and you're in need of a true alternative to guarantor loans then here are a few options:
Banks or building societies
If your bank feels you can be trusted you could be offered a loan tailored to account activity.
Credit line products
These finance companies offer a great alternative to conventional borrowing by providing a revolving line of credit.
Credit Unions are more forgiving than traditional UK guarantor loans but do require you to be a member before applying.
These niche lenders have partnered with people to offer sums of capital so people can borrow. The relationship will be managed by the third party but you will essentially be borrowing from another person and not a company.
Bad credit loans
If you have a limited or poor credit history then a bad credit loan might be a suitable alternative. Borrowing money will be more expensive than if you choose to find a guarantor but if you've looked and run into problems this may be an option.
The purpose of these products is to tide you over until your next pay date. They aren't the most affordable loans so our guidance would be to carefully consider if you're in a position to handle the risks of dealing with the higher fees associated with these types of unsecured loans.
If you're having difficulties determining the right loan for your individual circumstances then credit cards have helped people improve their financial situation. They give you the opportunity to borrow money as you need it and make repayments easily and often which shows evidence of instances where you've managed credit responsibly and should help to boost your score.
Guarantor loans FAQs
Yes, both the applicant and the guarantor will be credit checked as part of the application. You will be soft credit checked by the lender as part of the initial application on Choose Wisely. Your guarantor will be soft checked initially so the lender can see how good their score is and before any final lending decision is made the lender will run a full credit check on both parties.
You can but as far as most lenders are concerned guarantors with poor credit histories are unlikely to be accepted. As an applicant, you’re better off finding a guarantor with a good credit history and if you’re thinking about being a guarantor then you’re better off focussing on raising your credit score before agreeing to support someone’s application.
In theory, it doesn’t really matter how much your guarantor earns per se. It matters if they have an income and the total amount of that income after tax is enough to take care of their own bills and leave enough disposable income to cover any repayments they may need to make on your behalf. Most lenders will also require a guarantors income to have an extra “buffer” of disposable income left over every month on top of what they need to pay their own bills and any repayments they may be required to make on the borrower’s behalf.
Yes, a guarantor can be retired. They must be able to show they have a regular source of income from their pension as an example and they are treated the same as any other guarantor in terms of being able to show they can afford to continue paying their own bills and meet any repayments should the borrower get into financial difficulty and not be able to pay.
There are 4 ways to stop being a guarantor. 1. If you and your borrower decide within the first 14 days of taking the loan that you no longer want it then you will be able to return the funds and cancel the agreement. After 14 days it’s at the discretion of the lender 2. Pay the loan off early for the borrower. 3. Have the borrower repay the loan early. 4. The lender goes out of business. Outside of this, there is not a lot you can do once you’ve signed your Guarantee and Indemnity to stop being someone’s guarantor.
If your guarantor is able to pay but is simply choosing not to, they are breaking the terms of the agreement that was signed when the loan was taken out. In this case, the lender may decide, and be within their rights, to take legal action.
In the eventuality that the guarantor’s financial circumstances have changed dramatically and they also cannot afford to meet the repayments then the lender will usually contact the borrower and the guarantor to work out a reasonable resolution for all parties. If further to this, there is no attempt made to repay the loan then the lender could decide to start legal proceedings or they may attempt to recover funds by accepting collateral as a form of repayment, although this is rare.
Most lenders will require guarantors to be employed. Essentially a guarantor needs to be able to show evidence that they have a regular income and can afford to meet any repayments the borrower can’t.
You may have exhausted all options of people who would stand to be your guarantor but it’s always worth creating a list of potential candidates to make sure you haven’t missed anyone. There are alternative products you could consider such as short term or payday loans, bad credit loans, credit lines or credit unions or you may consider a credit card opposed to a loan.
In short yes, it is possible to borrow and have 2 guarantor loans. Alternatively, it is possible to be a guarantor on 2 different loan agreements, providing that it is affordable for you as the borrower or the guarantor to maintain your commitments to both agreements. If it’s not realistic to expect you to cover the cost of living plus the repayments on both agreements then the chances are you will be declined access to borrow or support a second application.
Borrowers: If you are the borrower on a loan agreement and you fail to keep up your repayments and the loan account goes into default then your credit score will suffer much the same as it would with any other unkept financial agreements.
Guarantors: Simply being a guarantor won’t affect your credit score. If you’re a guarantor on a loan agreement and the borrower falls into arrears, and you don’t step in to help, and the account subsequently goes into default then this will show on your credit report and will affect your credit score.
Guarantor loans can be a great way of getting the finance you need if your credit score isn’t great. All reputable and licensed lenders will carry out affordability checks prior to lending any money and they won’t lend if you and your guarantor aren’t suitable so, in that sense, they are a good idea. It is important to approach lending decisions responsibly. The risks with lending normally arise when your financial circumstances change dramatically in a short period. Our advice in this eventuality would be to let your lender know about the changes in your circumstance early on so you and the lender can come to an arrangement that works for both parties.
The main disadvantage people find with guarantor loans is the fact you will need to approach someone to support your application. This requires going into the situation with open eyes for both parties. You will need to be able to talk to your chosen candidate(s) openly and honestly about your finances if you are to persuade them to help you get finance. Of course, not everyone can find a suitable candidate in which case we would recommend looking at an alternative lending product.
All regulated lenders will require you pass affordability checks and answer forms with questions about things like marital and residential status, your income, whether you have any other debts, if you receive any benefits and other personal details so they can assess your ability to meet your financial responsibilities. This means any application is based entirely on your personal circumstances. There may be one difference in your circumstance that may make you a more or less desirable candidate for consideration. In essence, as with all personal loans, there is no one size fits all approach. Lenders ensure you're assessed on your individual eligibility before deciding if you're applicable. For that reason, we can't recommend which organisation is the best for you until you complete the get accepted application process.