If you’re struggling to get a personal loan because of a poor or limited credit history, you may want to ask someone to act as a guarantor for the debt.
This way, you can apply for a guarantor loan, with a second person agreeing to be responsible for the debt if you’re unable to keep up with repayments.
This is what you need to know about guarantor loans.
What is a guarantor loan?
A guarantor loan is a type of unsecured personal loan that enables you to borrow money if you have no, little, or a poor credit history. The main difference between these and other forms of lending is that they require a third party, the guarantor, to agree to step in and make the repayments if you are unable to do so.
Guarantor loans typically come with higher annual percentage rates (APRs) than standard personal loans, as they are aimed at borrowers with tarnished credit histories. But as with any loan, the rate you receive will depend on your personal circumstances.
Smaller, specialist lenders tend to offer guarantor loans, and are typically offered online by providers. You can find the best personal loans for you by using a comparison service. This will give you an overview of the market, and the kind of rates you may get.
How much can you borrow?
The amount you can borrow will depend on a number of factors, including, your personal circumstances, reasons for taking out the loan, credit history, plus your overall financial situation (including any current debts).
You may be offered less than you originally requested, depending how much the lender believes you, and your guarantor, can afford to repay. But, typically, requests for borrowing range between £1,000 and £15,000.
What can you use a guarantor loan for?
As with personal loans, a guarantor loan might be used for a variety of reasons, including home improvements or buying a car. As always, it’s advisable to consider your reasons for taking on any debt, particularly if you may struggle to meet repayments. In this case, you’d be better off looking for help to manage your finances.
While you won’t require a good or excellent credit rating to take out a guarantor loan, you will have to show you can afford the repayments as part of your outgoings. So, consider what you can truly afford to repay each month before applying for a loan.
Also, think about the pros and cons of this type of loan arrangement before applying:
If you have a poor credit score and need a loan for a particular reason, guarantor loans may be the right option for you.
You may be able to borrow more money than you would with a standard unsecured personal loan, depending on your personal situation.
Provided you make your repayments on time, taking out a loan may offer a chance to improve a poor credit history.
You may pay a higher interest rate for a guarantor loan than for a standard unsecured loan.
Your relationship with the guarantor may suffer if you fail to make payments and they become responsible for your debt and repayments.
If you sign up to be a guarantor and become liable for the debt, this could seriously impact your financial situation. Particularly if you, too, struggle to meet payments.
Who is the guarantor?
A guarantor is, usually, someone aged over 21 and close to you such as a family member or friend with both a good credit history and a UK bank account. He/she must be in a strong enough financial situation to meet repayments, if required to do so. This will be assessed during the application process.
What are the risks of being a guarantor?
The guarantor is willing to enter into a legally binding relationship to meet repayments on your behalf if you fail to do so, and should understand the responsibilities and risks this involves.
It’s important to take the implications of being a guarantor seriously, as there are potential consequences if you become liable for repayments and the overall debt. What if your situation changed, or you lost your job? If you found yourself financially squeezed, would you struggle to meet the repayments? Your credit score could suffer and you might even face legal proceedings from the original lender pursuing a debt.
You should only sign up to being a guarantor if you’re certain you’re comfortable with the arrangement, and its implications for you and your relationship with the borrower.