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What does a Guarantor on a Loan do?

Guarantor loans can be a good option for people struggling to obtain credit. Read more about guarantor loans and their benefits.
A man and a woman holding a guarantor loan document.

If you’re struggling to get a loan, possibly due to bad credit, you might have looked into guarantor loans. These can be an attractive option if you know you can afford the repayments for a loan but keep getting turned down. But what exactly is a guarantor loan?

What is a guarantor?

A guarantor is someone (usually a friend or family member) who is willing to make payments for you if you cannot afford it. A guarantor guarantees that any payment for a loan, mortgage or other, will be paid no matter what.

It works as insurance for the loan company – that if your financial situation changes, they’ll still get their payment.

Often, landlords will ask you for a guarantor when renting a property (someone that will pay your rent if you can’t afford to). This is when you might have heard of a guarantor, but maybe not a guarantor loan.

What is a guarantor loan?

An illustration of a keyhole and a signed document.

A guarantor loan is a personal loan taken out with a guarantor in case you stop being able to afford the repayments.

“Guarantor on loan” means you need a guarantor, or someone who is willing to make the monthly repayments if you can’t to get this type of loan.

If your loan application is denied due to a bad credit score, this could be a way for you to be reconsidered.

Most loan providers offer guarantor loans. But as always, make sure you compare guarantor loans when choosing the right one for you. They’ll all have different interest rates and some may come with hidden fees or charges. For example, many lenders will charge you if you want to pay off your loan early.

How do guarantor loans work?

Guarantor loans work like a regular loan. You find the one you’d like and then make a loan application. Usually this happens online, but you can go directly to your bank. The difference is that your guarantor will also be contacted and need to fill out a form and send in some proof that they can afford the repayments.

You will then need to pay back the loan in monthly instalments. Usually, these will be a fixed amount or the minimum amount, which can vary, but for credit cards it is normally £25.

When a borrower fails to meet their monthly repayments, the guarantor would be responsible for making the loan repayments.

They’ll always perform a credit check when you submit a loan application, and in this case, they’ll check the credit history of both you and your guarantor.

Why would you need a guarantor?

Maybe you have a good credit history but you’re still being turned down for a no guarantor loan. A loan provider may be reluctant to lend to you, if:

  • You have no credit history
  • You've just started a new job
  • You have a low income

Responsible lenders will take all of this into account before granting you a loan. You may find it frustrating when you’re being denied a loan by a direct lender, but it is important for both them and you, that you’ll be able to afford the repayments. Taking out any type of loan that you can’t afford will just make your financial circumstances worse in the long run.

If you’re thinking about a guarantor loan because of poor credit history, you need to be sure you’ll have enough money to make your monthly payments.

Who can be a guarantor?

There are certain criteria someone must meet to be a guarantor in the UK:

  • Have a good credit rating
  • Be over 21 years old
  • Be financially stable
  • Be a UK resident

You are more likely to be accepted as a guarantor if you’re a homeowner.

Usually, a friend or family member will be your guarantor, most commonly a parent, but you can ask anyone to be your guarantor. A family member might be more likely to say yes, but if you’re struggling to find a relative with a good credit history, you can ask anyone you might know who has a UK bank account and a steady income.

Keep in mind though, that not everyone will be comfortable being a guarantor.

Does a guarantor loan affect your credit rating?

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Any type of loan affects your credit score, including guarantor loans. When you take out a loan it will negatively impact your credit score, but if you’re making payments on time and in full, it should improve your credit score in the long run.

Monthly loan repayments are a serious commitment and you should only ever take out a loan if you can afford it.

If you have a poor credit rating either from previous loans or because you have no credit history, a guarantor loan might be your only option to borrow money.

Can I get a guarantor loan even with a bad credit history?

Guarantor loans were designed for people with a bad credit history.

If you know you can afford the repayments, you don’t need to let a poor credit history stand in the way of getting a loan. Guarantor loans enable you to borrow money even with bad credit. But keep in mind that the provider will check both your and your guarantor’s credit scores.

It’s also a way to get a loan even with no previous credit history.

How much do guarantor loans cost?

Guarantor loans cost the same as any other type of loan, meaning it depends on the interest rate and any other fees.

Guarantor loan providers are allowed to charge the maximum annual interest rate if they’d like, but usually interest rates are lower with a guarantor because the loan companies are taking less of a risk.

Can I have a guarantor on an unsecured loan?

You can have a guarantor on an unsecured loan. You cannot have a guarantor on a secured loan because the loan is already fixed by an asset. For example, a mortgage would be fixed against your property. That works as a fail safe for the provider instead of a guarantor. If you fail to meet your mortgage payments, instead of your guarantor making your monthly payments, they may (in rare cases) repossess your house to get their money back.

What is considered a low APR for guarantor loans?

A low APR for guarantor loans is typically around 25%. But the interest rate can be as high as 69%.

Although the interest rate may be lower with guarantor loans than with a loan without a guarantor, for those with bad credit, they’ll still typically have a higher interest rate than loans that are available to those with a good credit history.

What is a co-signer on a loan?

A loan co-signer signs the loan agreement with the primary borrower as an equal partner. This means you both have taken out the loan.

A co-signer is normally a partner or parent, someone that will share the loan with you.

Guarantors vs. co-signers

The difference between guarantors and co-signers is that a co-signer is someone who takes equal responsibility for loan repayments. It is 50% their responsibility to pay back the loan and 50% yours – unlike a guarantor who only needs to pay if you default on your monthly repayments.

Unless you are signing up for a mortgage with a partner or family member, finding a co-signer could be more challenging. The co-signer needs to accept half the responsibility so if they’re not benefiting from the loan, then the financial risk might be too high for them.

What are the risks of a guarantor loan?

A guarantor loan carries the same risks as any kind of loan, but it comes with an extra risk. Your relationship with your guarantor, or vice versa, could be affected.

If you’re thinking about being a guarantor, you need to ask yourself:

  • Do you trust the borrower?
  • Do you think they have enough money to make the monthly payments?
  • Do you have a comfortable income that means you could make the loan repayments without it affecting your day-to-day life?
  • Is it worth affecting your credit file?

You might feel socially pressured to say yes, but it’s important to put yourself first.

If you want to be a guarantor, they will ask for a copy of your last three bank statements and proof of ID.

An image of a hand pressing an apply button on a mobile phone screen.

To summarise

If you’re thinking about guarantor loans:

  • Compare loans - see what's out there. Guarantor loans are the same as regular loans in the sense that they all have different interest rates and charges.
  • Ask yourself, can I afford to meet the monthly repayments?
  • And if I can no longer afford the repayments, do I feel comfortable that my guarantor can?

If you’re struggling with a guarantor loan, or any other kind of unsecured loans such as payday loans, credit card debt, or a personal loan, we may be able to help. If you have several creditors chasing you, it might be time to consider a debt consolidation loan. This is a type of loan that enables you to pool several debts into one affordable monthly payment.

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APRs from 5.8% to 89.9%

We are a broker, not a lender.

Unsecured Loan Representative 69.9% APR

Borrowing £7,500 over 36 months, repaying £502 per month, total repayable £18,083. Total cost of credit £10,583. Interest rate 69.9% (variable). The lenders on our panel offer loans for 12-60 months, with rates from 5.8% APR to 89.9% APR. The Representative Example is based on all loans paid out by lenders between 19th Apr 2022 and 23rd Dec 2022.

Secured Representative 11.7% APR

If you choose to add fees to the loan: Assumed borrowing of £25,000 over 120 months, plus a broker fee of £2,500 and a lender fee of £250 would result in monthly repayments of £345.55, the borrowing rate is 8.6% (variable), the APRC is 11.7% (variable), total charge for credit £16,466.00 and the total amount payable £41,466.00. You can opt to pay the lender and/or broker fees upfront, your adviser will discuss these options with you.

Think carefully before securing other debts against your home. Your home may be repossessed if you do not keep up repayments on a mortgage or any debt secured on it. All rates vary subject to loan amount, loan type and status. Repaying your debt over a longer period of time may increase the amount you pay.

Further reading

What are the Different Kinds of Unsecured Loans?

Understand what an unsecured loan is, and how best to use the different kinds of unsecured loans in 2023.

What are the Different Types of Secured Loans?

With so many different types of loans available, it can be difficult to know which is right for you. For more information on secured loans, read this expert article.

Persistent Debt – What Does it Mean for Your Credit?

Persistent debt can affect your credit rating for a significant time period. Read to find out more.