If you find it difficult to get a loan, perhaps because you have a poor or limited credit history, you might look to a guarantor loan for a way to access this type of borrowing.
With a guarantor loan, the guarantor agrees to repay the loan if the borrower can’t. It is the borrower’s loan, but the guarantor is legally obliged to cover payments and any other fees if the borrower defaults on the agreement. Here’s how to apply for a guarantor loan.
How do guarantor loans work?
Guarantor loans work in a similar way to unsecured loans. The main difference is that the loan provider has a guarantee that it will receive repayment from your guarantor if you, the borrower, defaults on the loan.
You agree to pay the loan back by monthly repayments for an agreed period of time. If you can’t pay, the guarantor must step in and make payments, plus any charges. If you miss a payment or default on the loan it could negatively affect both your credit records.
This is a legally binding contract for both the borrower and the guarantor. So you should both consider it carefully before signing on the dotted line.
Who are guarantor loans for?
Guarantor loans are for people who have poor credit or no credit history who may otherwise have trouble getting credit. If you have previously been turned down for a loan, lenders may be more willing to lend to you if your application is reinforced by a guarantor with a strong credit history.
It’s worth knowing that compared with some other types of loans, guarantor loans typically offer high interest rates, well above the rates offered to borrowers with good credit.
Who can be a loan guarantor?
A loan guarantor can be almost anyone, provided they meet the age requirements, have a good credit history and are financially stable. They may be a close friend, relative or even a close colleague. They usually also need to be homeowners, though non-homeowner guarantor loans are available.
They will need to be someone you trust and you’re comfortable discussing your finances with. Partners may not be accepted, especially if you are financially linked, such as sharing a bank account, but this can depend on the provider.
Applying for a guarantor loan
Once someone has agreed to be your guarantor, you will need to consider the following to apply for a guarantor loan:
- Look at the total cost over the time you choose to pay it off, including interest rates and charges, which is shown as the annual percentage rate or APR.
- Check that you and your guarantor are eligible. Read the loan requirements carefully before you apply to reduce your risk of refusal. Limiting the number of loan or credit applications over a short period can help protect your credit score.
- Make sure the loan is affordableand that you can comfortably make the repayments each month.
- Prepare some basic information for proof of ID and your income. You and the guarantor will be asked to provide personal and financial information, and the lender will carry out a credit check and affordability checks. They may also call you and the guarantor to confirm some details and make sure you both can afford to repay the loan.
If the lender accepts your application, the money can be transferred to the guarantor initially. This can happen relatively quickly, sometimes within 24 hours, but it can depend on the lender and if you’ve provided the information it needs.
The guarantor has a 14-day cooling-off period, during which time they can either transfer the money into your account or change their mind and return it to the lender.
You can compare guarantor loans through a comparison site to find the loan that suits you, or you can go directly to a lender.
How much can I borrow with a guarantor loan?
While most lenders will offer up to £10,000, this depends on the lender, your financial circumstances and your guarantor’s financial credentials, such as their income and homeowner status.
Pros and cons of guarantor loans
It’s a good idea to weigh up the potential benefits and drawbacks of guarantor loans before going ahead. For the borrower, the pros and cons of a guarantor loan might be:
Alternatives to guarantor loans
If you can afford to wait a few months, you could consider improving your credit score before you apply for a loan. This may increase your chances of being offered lower rates of interest and getting a standard loan without a guarantor.
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A guarantor mortgage can help applicants who are unable to secure a mortgage on their own, perhaps because they have bad credit. There are various pros and cons of guarantor mortgages but a guarantor should remember they will be liable should the applicant default on their repayments.
Guarantor car finance is when you take out a loan to buy a car, and a third-party agrees to repay it if you don’t. By reducing risk for the lender, this can help those with poor or no credit history to access finance.