Guarantor loans

If you’re struggling to get a loan, guarantor loans offer an opportunity to borrow, with the help of a guarantor. A family member or friend ‘guarantees’ to cover your payments if you can’t.

Guaranteed loans can be a good option if you’re starting out and don’t have a credit history. Or, you may have a poor track record when it comes to managing your credit, with missed credit repayments, defaults on an account or too many credit applications. One of the benefits of a guarantor loan is that they give you a chance to build a good credit score, providing you keep up with your repayments.

Guarantor loans work in the same way as any loan, you borrow money from the lender, and then pay it back in monthly instalments. The only difference is that a third party, your ‘guarantor’ is part of the agreement – having guaranteed to make your payments if you can’t.

Depending on the lender, the guarantor will sometimes initially receive the loan. At this stage, they can decide whether to give it to the borrower, or give it back to the lender within the two-week ‘cooling-off period’. Providing the guarantor is happy with the agreement, you (the borrower) will receive a lump sum. You’ll have to pay it back per the terms of your loan (usually between one and seven years).

A guarantor loan can help if you have a bad credit score and have been rejected by other lenders. Guaranteed loans give you an opportunity to access finance – they’re most often used to cover lifestyle and emergency expenses such as boiler breakdowns, or bigger expenses like home improvements, education, weddings or buying a car.

As with all forms of credit, it’s also a chance to improve your credit score if you manage to keep up with your repayments and prove you’re a good borrower. A better credit score will make applying for loans and credit cards easier in the future, and you’ll also be eligible for better rates.

It’s worth keeping in mind that guarantor loans can be expensive, often with higher APRs than other types of loans. So make sure you need it before taking it out – and make sure you can keep up with the payments. Other than that, they are reasonably low-risk. It’s riskier for your guarantor; if you cannot make the payments for any reason, they will be required to pay instead.

If you’re going to guarantee a loan for someone, it’s a good idea to read about the risks and what goes into being a guarantor.

Choose someone you trust. The person you ask to be your guarantor, needs to be someone you’re happy to openly discuss your finances with. That’s most likely to be a family member or a close friend but almost anyone can act as a guarantor: a parent, a sibling or even a colleague.

Guarantors need a good credit history and must be over 21 years old, and they usually need to be homeowners. As part of the application process, guarantors will need to undergo a credit check, and provide bank details, proof of ID, and bank statements.