“With a guarantor loan, the lender has the guarantor to act as a safety net...”
Guarantor loans explained
A guarantor loan requires another person to agree that if you’re unable to repay the money you’ve borrowed, they will.
When a lender agrees to lend you money, they need some assurance that they will get it back. One way they can do this is by looking at your credit history to see how well you’ve managed your borrowing in the past. This lets them make an educated guess about your ability to repay them. With a guarantor loan, the lender has the guarantor to act as a safety net. So although it’s you who is borrowing the money, this type of loan is actually a three-way agreement between yourself, the lender and the guarantor.
Because of the added security provided to the lender by a guarantor, this type of loan could be an option for people who may not have the best credit history and will otherwise struggle to be approved for a loan from a high street lender. However, while a guarantor loan may sound like an easy solution to money problems, it can be a lot more complicated. Let’s take a closer look at how these loans work.
“A guarantor can be a friend, family member or colleague, but you can’t ask your spouse...”
Who can be a guarantor?
For your application to be accepted, the guarantor must fulfil certain requirements. For example, they will have to undergo a credit check themselves so the lender can decide whether they will present a risk or if they have a history of responsible borrowing.
A guarantor can be a friend, family member or colleague, but you can’t ask your spouse, as they will most likely already be financially tied to you. 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.
“Providing you make your loan repayments on time and don’t miss any, you should start to build up a credit history...”
Why do people want them?
Borrowers might consider a guarantor loan as an alternative to a payday loan or an unsecured personal loan. The interest rate on a guarantor loan will be less than that on a payday loan, but it is still going to be higher than a conventional personal loan from a bank. This is because although the lender has the assurance of the guarantor, it’s difficult for them to make a judgement on your ability to pay, because you have a poor credit history.
Providing you make your loan repayments on time and don’t miss any, you should start to build up a credit history – and your guarantor’s own credit history will not be affected.
“If the borrower stops paying the loan, the lender will start to chase you for the outstanding balance...”
What if you’re the guarantor?
If you volunteer to be the guarantor on someone’s loan, you need to be aware of exactly what this involves.
The loan itself shouldn’t show up on your credit history, as it would if you had taken out a joint loan. If the borrower makes their payments on time, while this can help their own credit history, yours won’t benefit. However, if they default on their repayments, this could show up on your credit history, as could legal action taken against them like the issuing of a county court judgement.
If the borrower stops paying the loan, the lender will start to chase you for the outstanding balance. And if you can’t make the payments either, your credit history will certainly be negatively affected. The lender also has the right to take legal action against you as well as the borrower.
Still want to know more, you can find it in part 2 of our guarantor loans guide.