Everything You Need to Know About Guarantor Loans
If you're looking for more information about guarantor loans, whether that’s small guarantor loans, instant guarantor loans or bank guarantor loans, we’ve covered everything you need to know in our comprehensive guide below.
What is a guarantor loan?
A guarantor loan is a type of loan that you take out with someone else, usually a close family member or friend who you have a good and trustworthy relationship with, who promises to pay your debt in the event that you’re unable to.
How does the guarantor loan process work?
A guarantor loan is a good way for someone to borrow money if they might otherwise struggle - for example, if they have a bad credit history and no lenders will offer them a loan.
These types of loans work just like any other kind; you borrow money from a lender and then pay it back in monthly installments over an agreed-upon period of time, usually between one and seven years. However, the guarantor part of this loan means that a third-party is involved in the agreement; they ‘guarantee’ to pay your loan back if you’re unable to.
When you’re granted the loan, it is sometimes passed immediately to the guarantor in your agreement, who can then decide to give it to the borrower straight away or give it back to the lender within the two-week cooling off period.
The borrower will receive the lump sum if the guarantor decides to give it to them and will have to pay it back over an agreed period of time.
Who can be a guarantor for a loan?
Who you choose to be your guarantor is entirely up to you, but there are a few conditions they will have to meet in order to qualify as being your guarantor.
It should be someone that you trust, such as a close family member or friend. They must also be 21 years or older, have a good credit history and depending on the lender you get your guarantor loan from, they may require your guarantor to also be a homeowner.
The guarantor will need to undergo a credit history check, proof of ID, bank details and bank statements as part of the application process for the loan.
Are guarantor loans a good idea?
Guarantor loans can be a good idea for both the borrower and the guarantor, providing that you have a trusting relationship.
However, things can sometimes get a little tricky when it comes to balancing financial agreements with close friends or family members as there is always risk involved.
Both the borrower and guarantor should be fully aware of the agreement that they’re entering into and be prepared for any financial eventuality. The guarantor must also be fully aware of the financial responsibility that is being placed on them, in the event that they have to pay back the borrower’s loan.
Can I get a loan with bad credit with a guarantor?
If you have bad credit, then guarantor loans are essentially designed with you in mind; they enable you to borrow money from a lender with a guarantor agreement in place who will cover the repayment costs of your loan in the event that you can no longer make them.
Do guarantor loans have higher interest rates?
Interest rates on guarantor loans can differ significantly depending on how much you borrow and which lender you borrow from.
However, it is thought that guarantor loans usually have higher interest rates than many other types of loans, especially over long periods of time, which could mean you'll be paying back much more than you originally borrowed.
How much can I borrow with a guarantor loan?
The amount of money you can borrow with a guarantor loan will depend on which lender you borrow the money from, but you’ll usualy be able to borrow between £1,000 and £10,000.
However, the money that you can borrow with a guarantor mortgage loan is usually much higher, and can sometimes be as much as five times your salary.
What if my guarantor can't or won't make my repayments?
Once a guarantor has entered into a loan agreement and agreed to be a guarantor, they can’t just stop being one.
In the event that the guarantor refuses to pay or is unable to make the repayments, the lender will try several different methods in order to retrieve the money from the guarantor, and will even resort to a legal court order if the guarantor refuses to pay as it is their legal obligation to make the repayments on behalf of the borrower as part of the guarantor loan agreement.
Will being a guarantor affect me getting a mortgage?
If you’re wondering if being a guarantor is bad for credit, in theory, it shouldn’t affect your credit score or your ability to get a mortgage.
However, if the borrower that you’re acting as a guarantor for cannot make the repayments for their loan and you have to make the payments for them, this could result in you potentially getting into debt yourself and thus affecting your credit score.
Before you agree to be a guarantor for someone, it’s imperative that you’re confident that you’ll be able to make the repayments on behalf of the borrower if you need to.
What credit score do you need to be a guarantor?
There isn’t an exact credit score that you need in order to be a guarantor; the score will vary depending on who the borrower is borrowing money from.
However, you do need to have a good credit score to be a guarantor and a bad credit score will likely result in your application to become a guarantor being rejected.
Guarantor loan alternatives
A guarantor loan is very similar to many other loans, so there are plenty of options to look into if you wish to apply for a loan. Below, we’ve listed some of the most common guarantor loan alternatives.
- 'Bad credit' card - known as a credit builder card
- Payday loan
- Credit unions
- Short-term loans
- Secured loan
If you are considering taking out a guarantor loan or another type of loan, it is important that you do your research beforehand so you know exactly what type of loan is right for you and your situation, how it works and what is expected of you in terms of repayment. By researching into the matter, you are more likely to find the best deal for you.
For further advice and information regarding loans and credit, take a look at our useful articles below.