Guarantor loans

If you have had credit problems in the past it can be tough to get a loan in your own name, especially if you still have a bad credit score.

What is a guarantor loan?

One possible solution is to take out a loan with someone else who agrees that they will step in and pay off the loan if you're unable to do keep up the payments.

This is known as a guarantor loan. The person who promises to pay your loan, known as a guarantor, is usually a family member, although it can be a friend.

Finding a guarantor loan online may be a good option if you are finding it difficult to get a loan by yourself or you have been refused credit by lenders.

How do guarantor loans work?

A guarantor loan can be either a secured or unsecured loan that requires you to have a guarantor - a person willing to meet your repayments if you can't.

Guarantor loans are becoming increasingly common and offer an alternative form of borrowing to those with a poor credit history.

There are many specialist guarantor loan companies, so it's worth shopping around to find the best rates.

Where can I find the best guarantor loans for bad credit?

You may find the best guarantor loans from a direct lender. This can be the case especially if you are looking for guarantor loans for people with bad credit as a direct lender may offer a range of different options.

If you're looking for very bad credit loans but have no guarantor it could be more difficult to get a direct lender to consider you. If this is the case you may need to rebuild your credit rating first before searching and applying for loans online.

How do I apply for a guarantor loan?

When you apply for your guarantor loan you supply the details of someone who will pay off your loan should you default on your payments.

This reduces the risk for the lender, meaning they're able to offer you lower interest rates than you could obtain elsewhere.

Your guarantor will only be called on to step in as a last resort. Most guarantors are not normally involved in repayments - but they must understand there is a risk they will have to honour the debt.

Who can be your guarantor?

A guarantor is usually a family member or a close friend, who trusts you to keep up with your repayments. But it can be anyone.

They can be related to you but they cannot be financially linked to you – for example it cannot be your spouse.

Typically, guarantors have to be aged between 21 and 75 with a good credit score.

As they will have a credit check to confirm that they have a good credit score, they will need to provide identification, proof of address, bank statements and other details.

Often they will need to be a UK homeowner too. If the lender requires security, they need to have enough equity to match the value of your loan.

What responsibility does a guarantor have?

A guarantor agrees to repay your loan if you are unable to do so. This is a big responsibility, as they will sign the loan agreement with you and the lender. If you cannot afford to repay the loan, your guarantor will need to step in and make the repayments for you.

For this reason, it's very important to talk through the issues with your potential guarantor before you go ahead with the loan. 

The guarantor needs to understand what happens if the loan is not repaid. If for example the guarantor was unable to make the repayments for you, their own personal credit score and credit rating might be adversely affected.

If you could not pay the loan and neither could your guarantor, your guarantor or you or both parties might be taken to court by the lender or be forced to repay the loan using their own money. Therefore, being a guarantor is a serious undertaking. 

Consider if you cannot repay the loan and the guarantor has to step in, what effect will that have on your relationship with the guarantor? It's really essential to discuss all these issues in advance so that your guarantor is comfortable with the level of risk they're taking on.

Guarantor loans - borrowing with bad credit

Guarantor loans are targeted at those with bad credit scores, namely if you have poor credit and have been turned down by mainstream lenders.

Having someone support you can help you borrow at more sustainable rates, and make it easier to pay back your debts.

Often this enables you to borrow higher sums than you would be able to from other bad credit lenders. Whilst they offer lower rates of interest than payday loans, they are still expensive, with typical APRs starting from around 35%.

Rebuilding your credit score

Meeting all the repayments of a guarantor loan can rebuild your credit score. This can make it more likely that you'll be accepted for mainstream unsecured loans and credit cards in the future with lower rates of interest.

You can also use credit builder cards to improve your credit score.

Bear in mind that while borrowing money actually helps to rebuild a poor credit score, it will only help if you borrow sustainably and can meet all your repayments.

If you're unsure of your credit score, it could be worth your time to check your credit report before applying for any form of credit.

Your score could be better than you think, or you can find and fix any problems on your record.

What to watch out for

Firstly, make sure you have a good relationship with your guarantor and that they understand the risks involved.

If the worst happens and you default on your payments they could end up having to cover your repayments, or even lose their home. If you have poor credit make sure you only borrow responsibly, well within your repayment abilities, and gradually work up to borrowing larger amounts.

Whilst a typical guarantor lender offers loans ranging from £1,000 to £7,500, some lenders will offer loans of up to £25,000. Even if you can get this amount, think about how much you are borrowing, and how certain you are that you can make repayments.

If you're struggling with your existing debts our guide on getting out of debt could be useful.

Read more …

• Bad credit loans | Loans for bad credit, poor credit loans

• How to improve your credit score and credit history