What is a guarantor on a loan?

A guarantor on a loan is somebody who co-signs a loan agreement, promising that they’ll cover the repayments if the borrower falls behind for whatever reason. This helps people with a low income or a bad or ‘thin’ credit history to borrow. For example, a parent may become a guarantor for their child (over the age of 18 years) who wouldn’t get approved for credit otherwise.

5 min read
daughter and father on laptop

How does a guarantor loan work? 

If you’re struggling to get a loan, you may consider getting a guarantor to boost your chances of approval.

With guarantor loans, the lender takes the guarantor’s credit history into account as well as the borrower’s. If the guarantor has a good credit history, the lender may be more willing to accept the application.

The guarantor acts as a safety net and reduces the risk of non-payment. This type of loan is a three-way agreement between the borrower, the lender, and the guarantor.

However, even with this added safety net, there’s no guarantee of acceptance, as this is down to the lender’s eligibility criteria.

Who can apply for a guarantor loan? 

Anyone can apply for a guarantor loan, as long as they: 

  • are at least 18 years old
  • have a UK bank account
  • are in full-time employment
  • can find someone they trust who is willing to be their guarantor

Because of the added security provided to the lender by the guarantor, this type of loan could be an option for people who may not have the best credit history and will otherwise struggle to get a mainstream loan. However, while it may sound like an easy solution, it can be a lot more complicated (which we’ll discuss below).

Who can be a guarantor for a loan? 

When it comes to who can be a guarantor for a loan, lenders all have their own criteria. Some require that you:

  • are at least 18 years old – some require you to be 21 years old or over
  • have a good credit history – proving that you are a reliable borrower
  • hold a UK bank account

Most providers of guarantor loans also insist that the guarantor is a homeowner; however, there are some that will now allow a tenant to be a guarantor. 

What does a guarantor need to provide? 

A guarantor will need to provide the lender with documentation to support the credit application, such as:

  • proof of identification – this shows that you are who you say you are
  • proof of address – so they know they can contact you
  • proof of income and outgoings – such as bank statements and/or payslips

Do guarantors get credit checked? 

Yes, the lender will conduct a credit check on both the borrower and the guarantor. They want to make sure the guarantor is a responsible borrower based on their financial past. If so, this should give them more confidence to lend.

If a guarantor has bad credit, they are likely to be declined, as it would be deemed as too high risk from the lender’s point of view.

It may be a good idea for both parties to check their credit reports with the three main credit reference agencies in the UK (Equifax, Experian and TransUnion). You can check your Equifax report for free (for life) through CredAbility. This will give you an idea of what lenders can see and which areas you might want to improve on before applying.

The lender will also conduct an affordability check, to assess the income and expenditure of the borrower and guarantor. This is to get an idea of how much they can afford to pay each month towards a loan – on top of their existing expenses.

What are the pros and cons of guarantor loans?  

It’s crucial to consider the advantages and disadvantages of guarantor loans before signing an agreement.

Pros 

If the borrower meets their repayment plan, the guarantor’s credit score won’t be affected

Providing the borrower makes their loan repayments on time and doesn’t miss any, the guarantor’s credit history and their own credit history will not be affected.

The borrower might be able to access a loan they couldn’t otherwise

A guarantor with a good credit score may enable the borrower to access credit they couldn’t get on their own.

It’ll give the borrower a chance to build up their credit score

The borrower will be able to use their loan to improve their credit history - as long as they always pay on time. This can boost their chances of getting approved for credit in the future.

Cons 

Both parties are fully responsible for paying the loan

Once you sign the loan agreement, both parties become financially responsible for the repayment of the loan. So, if the borrower misses a payment, the lender can chase the guarantor for the money – and missed payments can affect the credit history of both signatories. Not only this, but relationships could also get damaged in the process.

High interest rates may apply

As guarantor loans are designed for those with bad or thin credit histories, it can lead to higher interest rates, compared to mainstream loans. This offsets some of the risk to the lender.

If legal action is taken, both parties will be involved

As a last resort, the lender could take legal action to recover funds, if the account goes into default and they still don’t receive any payments.

It’s worth remembering that this would only happen if both the borrower and the guarantor fail to make repayments on the loan - and the lender has exhausted every other option.

How long does being a guarantor last? 

Once you sign the credit agreement and the money is paid out, the guarantor is legally bound until the loan is paid off. They’re not able to stop being a guarantor before this point. This is because their financial history had an impact on the deal that was agreed upon.

There are some exceptional circumstances where you can stop being a guarantor, such as if you signed under duress or were duped into agreeing. If you believe this applies to you, contact Citizen’s Advice for help.