Guarantor loans

What is a guarantor loan?

A guarantor loan is a type of personal loan where a guarantor, typically a family member or close friend, agrees to repay the debt if the borrower cannot make the payments. This type of loan is beneficial for individuals with poor or limited credit history, as it allows them to borrow money and build a good credit score through timely loan repayments. Guarantor loans can be either secured or unsecured, affecting the guarantor's potential risk. Secured loans may involve the guarantor's property, while unsecured loans do not. By ensuring regular monthly payments, borrowers can improve their credit rating and financial situation over time.

How do guarantor loans work?

Guarantor loans involve three parties: the borrower, the guarantor, and the lender. The borrower takes out the loan, while the guarantor, typically a close friend or family member, agrees to repay the loan if the borrower fails to make repayments. The lender verifies the guarantor’s ID and creditworthiness through a credit check.

Upon approval, the guarantor might receive the loan amount first, with a cooling-off period of around 14 days to decide whether to give the money to the borrower or return it. Once the guarantor proceeds, the borrower starts making monthly repayments, including interest, according to the loan terms. This setup provides security for the lender and a chance for the borrower to build their credit history.

What are the benefits of a guarantor loan over another type of loan?

Guarantor loans offer several benefits, especially for those with a bad credit score. Here are some advantages:

• Access to finance: If you've been rejected for standard loans, a guarantor loan provides access to funds.
• Credit score improvement: Making timely repayments helps improve your credit score.
• Lenient eligibility: More accessible for individuals with poor or no credit history.
• Higher borrowing limits: Potential to borrow more than you could on your own, but ensure manageable repayments.

These benefits make guarantor loans a viable option for rebuilding your credit rating and securing necessary funds.

What are the risks of a guarantor loan?

Guarantor loans carry several risks that both borrowers and guarantors should consider:

• Expensive APR: Interest rates are generally higher than standard personal loans, making repayments more costly.
• Payment Responsibility: If the borrower misses payments, the guarantor must cover them, which can strain their finances.
• Credit Impact: Failure to repay can negatively affect the credit scores of both the borrower and the guarantor.
• Legal Consequences: The lender may take legal action, such as court proceedings, against the guarantor, potentially leading to County Court Judgements (CCJs) or other legal issues.
• Property Risk: For secured loans, the guarantor’s property might be at risk if repayments are not made.

These risks highlight the importance of carefully considering whether a guarantor loan is the right choice for your financial situation.

How much can I borrow with a guarantor loan?

With a guarantor loan, you can typically borrow between £1,000 and £25,000. Some lenders may offer loans up to £50,000, depending on several factors:

• Your income
• Credit score
• Debt-to-income ratio
• Whether the loan is secured against your home
• Purpose of the loan

Lenders assess your financial situation to determine the amount you can borrow. Use a loan calculator to estimate your repayments based on the loan amount, term, and interest rate, ensuring the loan fits within your financial capabilities.

How much do guarantor loans cost?

Guarantor loans for those with bad credit often come with higher costs. Interest rates, or APR, can be significantly higher than other loan types, sometimes reaching up to 50%. This increased cost reflects the higher risk perceived by lenders, despite the presence of a guarantor. Always compare guarantor loans to understand the full cost and ensure it fits within your financial plan. Consider the total repayment amount, including interest, before committing to a guarantor loan.

Who can I get to be my guarantor?

Your guarantor should be someone you trust, ideally a close friend or family member. They need to have a good credit history and be willing to take on the responsibility of your loan repayments if you default.

Key criteria for a guarantor include:

• Good credit history
• UK resident with a UK bank account
• Regular income
• Homeowner (preferred by some lenders)
• Aged 21-75 (varies by lender)
• Not financially linked to you (e.g., not your spouse)

The guarantor must understand their financial commitment and sign a legally binding contract. Lenders prefer guarantors who are close to you, as they are more likely to take their responsibilities seriously. Make sure your chosen guarantor is fully aware of their obligations and the potential risks involved.

What should I look for in a guarantor loan?

Evaluate the APR (Annual Percentage Rate) to understand the overall cost. Check the monthly payments to ensure they fit within your budget. Consider the repayment period to see if it suits your financial situation. Use Moneyrepublic to compare guarantor loans and find the best option.

Is a guarantor loan right for me?

Carefully consider your repayment capability. Ensure you can make payments without needing your guarantor to step in. Financial issues can strain personal relationships, so discuss the implications with your guarantor. Evaluate all alternatives, such as credit unions or other personal loans, before deciding. Consider the long-term impact on both your finances and relationships. Make sure this type of loan aligns with your financial goals and situation. Always explore all options to find the best fit for your needs and circumstances, Moneyrepublic will help you find the right option.