What are guarantor loans?

What are guarantor loans?

A guarantor loan is a type of loan where someone else (called a ‘guarantor’) promises to pay back the money if you can't. This person is usually a family member or close friend who trusts you.

These loans can help people with poor credit scores or those who haven't borrowed money before. Lenders feel safer giving you money because they know someone else will pay if you don't.

Guarantor loans usually let you borrow between £1,000 and £10,000, and you can pay them back over 1 to 5 years. These amounts and terms can vary depending on the lender and their criteria.

How do guarantor loans work?

When you apply for a guarantor loan, both you and your guarantor need to complete an application. The lender will check both of your financial situations.

If approved, the money goes into your account (or sometimes your guarantor's account first). You then make monthly payments to pay back the loan.

Your guarantor only needs to step in if you miss payments. If this happens, the lender will contact your guarantor and ask them to pay instead.

Remember that:

• You both sign legal agreements
• The guarantor must be willing to cover your payments if needed
• The loan affects both your credit scores
• Interest rates are often higher than standard loans

Can you remove yourself as a guarantor on a loan?

Once you've signed the guarantor agreement, you usually can't remove yourself as guarantor from the loan until it's fully paid off. The legal contract binds you to cover payments if the borrower can't pay.

However, some lenders might let you step down if the main borrower can prove they can handle payments alone or find a replacement guarantor.

You could also ask if the borrower can refinance the loan in their name only. Always check your loan agreement and speak to the lender about your options if you want to withdraw as guarantor.

Who are guarantor loans suitable for?

Guarantor loans work well for:

• People with poor credit scores who can't get loans elsewhere
• Young adults who haven't borrowed money before
• People who have just moved to the UK
• Anyone who wants to improve their credit score

You need to have a steady income to make the repayments. Plus, you must find someone who trusts you enough to be your guarantor.

Your guarantor needs to:

• Be 21-75 years old (depending on the lender)
• Have good credit
• Often be a homeowner
• Not be financially linked to you (like a spouse might be)
• Trust you to make the payments

What happens if I do not repay a guarantor loan?

If you miss payments on your guarantor loan, several things will happen. First, the lender will contact you to find out why you haven't paid and try to help you get back on track.

If you still can't pay, the lender will then contact your guarantor. Your guarantor must step in and make the payments you've missed. This is what they agreed to when they signed the loan documents.

Missing payments will hurt your credit score, making it harder to borrow money in the future. If both you and your guarantor stop paying, the loan company may take stronger action:

• They might use debt collectors to recover the money
• They could take your guarantor to court
• If your guarantor owns a home, the lender might eventually try to claim money against their property

The most important thing to remember is that not repaying your loan puts your guarantor's finances and credit score at risk. This can damage your relationship with them. Always talk to your lender early if you're having trouble making payments.

How can I get a guarantor loan?

Getting a guarantor loan takes a few steps:

1. Talk to someone you trust about being your guarantor before you apply
2. Compare different lenders to find the best rates
3. Fill out the application forms (both you and your guarantor)
4. Provide proof of identity and address
5. Show details of your income and spending
6. Wait for the lender to check everything
7. If approved, the money will arrive in your bank account (or your guarantor’s)

The process usually takes a few days. Some lenders might pay out on the same day once everything is approved.

What loans can I get without a guarantor?

If you don't want to ask someone to be your guarantor, you may have other options:

• Secured loans where you use something you own (like a home) as security
• Bad credit loans which are designed for people with poorer credit histories
• Credit union loans often have lower interest rates and more flexible terms

Are guarantor loans a good idea?

Guarantor loans can be helpful, but they also have risks.

Pros:

• You can borrow money even with poor credit
• They help you build a better credit score if you make all payments
• You might get lower interest rates than with some other bad credit loans
• You can borrow larger amounts than with payday loans

Cons:

• They put your relationship with your guarantor at risk
• Interest rates are usually higher than standard loans
• Your guarantor's credit score and finances are at risk
• Missing payments affects both your credit scores

Always think carefully before getting a guarantor loan. Make sure you can afford the monthly payments. Talk openly with your potential guarantor about the risks they face.

Remember, borrowing money is a big responsibility. Only borrow if you genuinely need to – and feel confident you can afford to repay it without putting pressure on yourself or your guarantor.

Disclaimer: We make every effort to ensure content is correct when published. Information on this website doesn't constitute financial advice, and we aren't responsible for the content of any external sites.