The complete guide to being a loan guarantor
The information you need to know
As a “loan guarantor” you are helping a friend or family member to:
1. Get a loan
It can be tough getting a loan with a poor credit history as most of the high street lenders are simply not interested.
2. Get an affordable rate
Some loans for people with a bad credit rating can be very expensive, though with a guarantor, loans can be more affordable
3. Repair their credit history
Taking out a loan and then successfully paying it back will help to repair someone’s credit file, enabling more affordable credit in the future.
But, what are the implications of being a guarantor? This is what we cover in this guide.
In this guide
- The 8 things you need to know
- Video - What you need to know before being a guarantor
- Being a guarantor FAQ’s
Who is this guide for? Anyone who is thinking of becoming a guarantor themselves; or someone who is about to ask someone to become their guarantor.
What you need to know
Before you decide to be a loan guarantor, there are eight things that you need to know.
You are helping someone to save money with a more affordable loan.
Guarantor loans are the most affordable type of loan for people with poor credit, with representative APRs ranging typically from 29% to 55%. Compare that to other bad credit loans which can range from 135% and over 1,000%. So, by becoming a guarantor you are helping someone to potentially save a great deal of money.
You need a good credit score.
Typically, our lenders will only allow guarantors with a good to marginally imperfect credit score. So, if your credit score is not good, it is unlikely that the application will be successful.
You do not need to be a homeowner, but if you are the borrower could get a better rate.
Some lenders offer better rates if the guarantor is a homeowner. The loan is not secured on your property, but lenders see homeowners as less of a risk.
You are liable to repay the loan if the borrower does not pay.
The reason why guarantor loans are generally more affordable, is that their guarantor is liable to repay the loan if the borrower defaults. You therefore need to make sure you trust the borrower before agreeing to become their guarantors.
The loan must be affordable for you.
During the loan application process, you will need to show that you are able to afford the loan repayments if the borrower defaults. This means being able to show a regular income, and expenses that are less than your income. You also need to be comfortable that if the borrower defaults that you are able to afford their loan repayments.
You will be credit searched.
During the loan application process you will be credit searched as well as the borrower, so it is advisable that the borrower does not make multiple loan applications with you as a guarantor, or this would not look good on your credit file if you are applying for other credit.
Defaults could affect your credit file
If loan repayments are missed, this could affect your credit file and your future ability to get credit. Most lenders are reasonable and will give you ample opportunity to make a payment if the borrower defaults, though you do need to be aware of this.
You’re helping someone repair their credit file
By helping someone to get credit, and assuming they pay it back, you are directly helping them to repair their credit history.
Frequently Asked Question about being a guarantor
Before you decide to be a loan guarantor, there are ten things that you need to know.
You will be liable for the full balance of the loan outstanding from the time that the borrower stops paying, which includes all the capital plus any interest and fees.
By being a guarantor on a loan you carry the same liability as if you had taken the loan yourself, so it is very important to make yourself comfortable that the borrower is fully able to meet their loan repayments.
It is also important that you are comfortable that if the worst happened and the borrower stops making their repayments, that you are able to meet the loan repayments on top of your existing financial commitments.
The benefit to you is that you are helping out a friend or family member access credit when they otherwise may be unable too.
Yes, your credit file will be fully checked at the point the signed and completed application is sent to the lender, just as it would be if you were making a loan application yourself.
Please note that at the stage before this, when you make an enquiry to a lender via our Loan Apply form, you are not credit checked.
A key part of the loan approval process for the lender is checking that the guarantor’s credit file is clean, as the borrower’s file is typically not good.
Yes, you will need to have a good credit history if the loan application is to be successful.
Some of our lenders do not need your credit file to be perfect, but the best value loans are only available to applicants whose guarantor has a fully clean credit file.
Please note that your credit history goes back six years, so you cannot have any missed payment or defaults on your file during this period.
If you are not 100% sure is your credit file is clean, have a look at your full credit file via Check My File, who offer the most comprehensive multi-agency credit file report in the UK.
You do have a right to cancel.
Right to cancel
The Financial Conduct Authority which regulates loans and credit agreements in the UK provides consumers with the right to cancel a distance contract within 14 calendar days.
In other words, if the loan is cancelled within 14 days of signing the loan agreement, then the loan agreement can be terminated and your liability as a loan backer ends.
If you or your borrower are looking to do this, please check your lender’s specific procedures regarding cancelling the agreement and seek advice from moneyadviceservice.org.uk.
Please note that you may be liable for interest and fees for the time you, or the borrower, did hold the funds.
Contact the lender
If this 14-day window has been missed, at the time of writing none of our lenders will allow a loan guarantor to be removed from a loan agreement once it has been signed, so the only option would be to terminate the loan agreement by fully re-paying the loan.
It is always worth approaching your lender directly to ask them for any options that may exist, as lenders do sometimes change their terms and conditions.
Just to reiterate, unless you are fully comfortable about being a guarantor then do not do it. To discuss this further, contact moneyadviceservice.org.uk the governments free and impartial money advice service.
- You need to be between 18 and 75 and be a UK resident
- You can be a homeowner or non-homeowner (homeowner loans are cheaper)
- Your credit file should be clean, or only marginally imperfect (clean credit file loans are cheaper)
- You should have a regular income (which could be a pension)
- You need a UK bank account with a debit card
Most lenders do not allow the applicant’s loan backer to be their husband or wife.
We do though have one lender who does accept an applicant’s spouse in this role.
The short answer is that you do not know.
But your relationship with the borrower and the steps that they take to make you feel comfortable should go a long way in helping you to decide if they will repay or not. For example, they should be able to tell you clearly:
a. why they want the money and what they are going to use it for
b. what income they have available to make the repayments
If they have taken time to demonstrate that the loan money is being sensibly used, and they also have the disposable income to cope with the additional loan repayments, then this may make you feel more comfortable.
You could ask them to provide you with an income and expenditure statement to more clearly show that they can cope with the repayments.
Unless you are comfortable about being a guarantor then this is something that you should not do.
When someone asks you to do this, especially if they are very close to you, then there may be pressure for you to say yes and emotions can cloud judgement.
As mentioned above, once you have agreed to be a guarantor and signed the loan agreement, then it may be impossible to have your name removed until the loan agreement has been paid back.
So if you trust the borrower, have a good relationship with them and are confident that they will make the monthly repayments, then being their guarantor could help them out a great deal.
But if you feel uncomfortable, and are not confident that they will repay, then please do not commit to something that you may later regret.
- Should you lend money to a friend? The 6 key questions before you do - The Mirror. 2015-01-12
- Consumer Rights: A guarantor can be a friend indeed if you can’t get credit - The Independent. 2013-09-21