Lenders use a number of factors (such as your credit score, the amount of time you have worked for your current employer etc.) in order to help them determine which applicants would present the least risk. If you don’t meet one of these requirements, you might not be able to get approved for a loan despite it being perfectly affordable for you. In such a situation, you could consider enlisting the help of a family member or a close friend to act as a guarantor.
When you ask someone to guarantee your loan, you are asking them to take on your debt if you default on your loan. If you agree to go guarantor on someone’s loan, you become legally responsible for the debt if they become unable to manage their repayments. Crucially, acting as guarantor does not mean “putting in a good word” for somebody, or providing a reference – you are volunteering to repay the loan in full (plus any interest and fees) if the borrower doesn’t.
If you are a guarantor and you apply for further credit of your own, you may need to declare the guarantee on your application.
The guarantor’s credit rating should not be affected unless the borrower defaults and the guarantor then fails to meet a repayment. However if the guarantor applies for a mortgage for example, the size of mortgage they could get might be affected by the guarantor loan, since they could find themselves responsible for that debt at any time.
What should I look for in a guarantor loan?
When it comes to comparing guarantor loans, there’s some key features to look for. Look at each loan’s features and costs before deciding which one suits your needs.
Total payable. How much of the loan amount, plus fees and interest you will be expect to pay.
Interest rate. Most guarantor loans charge a fixed rate of interest, meaning your monthly repayments will stay the same throughout the loan. Remember that the advertised rate is not necessarily the rate that the lender will offer you.
Fees. Are there any application/set-up/product, late payment, early repayment or overpayment fees?
Loan terms and amounts. Aim for a shorter term that gives you monthly repayments you can afford. The longer the loan period, the more money you are likely to pay.
Eligibility criteria. Does the borrower and guarantor both meet their individual criteria?
Early repayment. There might not be any fees for repaying your loan early, but many lenders will charge an additional two months’ interest on any sums repaid ahead of time.
Homeowner or non-homeowner guarantor loans
Some lenders divide their loans into two categories – either for homeowner guarantors or non-homeowner guarantors. The term “non-homeowner” refers to the residential status of the guarantor, not the applicant (borrower).
Non-homeowner or tenant guarantor loans usually have a higher interest rate than homeowner guarantor loans, because of the perceived increased risk to the lender and the complication of involving a guarantor.
These are the typical steps that an application for a guarantor loan will go through:
Fill in details and sign agreement.
Guarantor fills in details
Your guarantor adds their info.
Credit & affordability checks
Both applicant and guarantor are checked by the lender.
Guarantor signs agreement
Once they're happy with the loan offer.
Lender contacts both parties
All parties may need to speak over the phone.
Loan is offered
Once lender is satisfied with both parties.
Offer is accepted
Applicant accepts and signs the offer.
Loan is sent to guarantor's bank account, who can then transfer to applicant.
Who can be my guarantor?
Criteria will vary from lender to lender, but as a minimum, you should expect that guarantor must:
Not be your spouse or partner.
Have a strong credit record.
Have an income (employed, self-employed or a pension).
UK resident and hold a UK bank account.
Have completely separate finances to your own.
Give their full consent to act as guarantor and understand the commitment they are undertaking.
Not every personal loan is a “guarantor” personal loan. Using a guarantor is a feature offered by some specialist lenders, including those listed above.
Thinking of being a guarantor?
I am satisfied that the borrower can manage the loan repayments. This is up to you to ensure, and may involve you seeking independent financial advice.
I have checked the terms of the loan agreement. This includes checking whether you can expect to be notified if the borrower defaults on the loan, and the extent of your liability.
I understand the lender doesn’t have to proceed with enforcement against the borrower before taking legal action against me as a guarantor. You have no right to insist on this as a guarantor.
I understand that I could end up paying more than the original amount borrowed. Unlike some forms of borrowing, interest on guarantor personal loans is not capped by the Financial Conduct Authority (FCA).
What’s the difference between a guarantor and a co-borrower?
If you’re a co-borrower, you are listed on the loan as a borrower and are jointly liable for the debt. If you are a guarantor, you only become responsible for the debt when the borrower defaults on the loan.
What is APR?
When you’re comparing guarantor loans, it won’t be long before you’ll come across the Annual Percentage Rate (APR). This figure is designed to provide an annual summary of the cost of a loan, taking into account both interest and any unavoidable fees (for example an arrangement fee) over the duration of a loan.
All lenders must calculate the APR of their products in the same way, and must tell you the APR before you sign an agreement. So for consumers, it can be a handy tool for comparison.
There’s a big catch, however. Almost all lenders tailor their interest rates to the individual applicant – so where they think there’s greater chance of not getting their money back, they’ll offer a higher interest rate. The representative APR is the APR that the lender realistically expects at least 51% of its borrowers to receive.
Many guarantor lenders have chosen to split out the loans they offer into loans where the guarantor is a homeowner, and loans where the guarantor isn’t a homeowner. As such you’ll sometimes see two different representative APRs for the same loan company, for example UK Credit and TrustTwo.
Frequently asked questions
A non-homeowner or tenant guarantor loan is not a secured loan, so it’s not tied to your home as collateral. If the borrower defaults, the guarantor will be called upon to continue paying off the loan.
As with most unsecured loans, most lenders could request a county court judgement (CCJ) or a “charging order” on a homeowner’s property if both the borrower and guarantor default on the loan. The charging order means the lender could obtain their outstanding debt from the sale or remortgaging of the guarantor’s home. However, lenders rarely resort to this action and will usually work with the borrower and guarantor to devise an alternative method of paying off the loan.
Yes. This is because, to the lender, they represent greater risk and the potential for complications in recouping funds in the event of default. They are also typically capped at lower amounts.
Yes. Make sure that the guarantor is aware of the full extent of their liability.
This is to avoid fraud and to guarantee the guarantor named in the paperwork really is the guarantor.
Yes, lenders tend of focus on your affordability and credit history when considering your loan application.
Chris Lilly is a publisher at finder.com. He's a specialist in credit-based products including business and personal loans, mortgages and credit cards, and is passionate about helping UK consumers make informed decisions about their borrowing. In his spare time Chris likes forcing his kids to exercise more.
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