A guarantor acts as support to a loan borrower (usually a friend or family member) by guaranteeing that their loan repayments are made.
By doing this, you are helping them to
- Get a loan – it can be tough getting a loan with a poor credit history.
- Get a more affordable rate – other bad credit loans can be very expensive.
- Repair their credit history – paying back loans helps repair your credit file.
What is a loan guarantor?
They are someone who “guarantees” someone else’s loan or credit contract i.e. promises to repay a debt if the borrower can't or won't.
A lender may insist the borrower has a guarantor for their loan if they are concerned about the person's ability to keep up their loan repayments, or if the borrower is under 18 years of age.
Who can be a guarantor for a loan?
- You need to be between 18 and 75 and a UK resident.
- You can be a homeowner or non-homeowner (homeowner loans are typically cheaper).
- Your credit file should be clean, or only marginally imperfect (clean credit file loans are typically cheaper).
- You should have a regular income (which could be a pension).
- You need a UK bank account with a debit card.
- The loan will need to be affordable to you.
During the application process you need to show that you can afford the repayments if the borrower defaults. This means being able to show a regular income and expenses that are less than your income. You need to be comfortable that if the borrower defaults you can afford their repayments.
Do guarantors get credit checked?
Yes, your credit file will be checked at the point the signed completed application is sent to the lender.
When getting loan quotes from our panel of lenders using the Loan Apply form, you are not credit checked at this stage.
- However, a key part of the loan approval process is checking the loan backer’s credit history is clean. More
Your credit history dates back six years so they will be looking for any missed payments, defaults or CCJ’s. A credit search will also consider whether you are on the local electoral register, plus if you have any other relevant financial associations.
So, when the lender does the search this will show up on your file. This generally is not a problem unless you do make multiple applications in quick succession, lenders do not like seeing this as it implies that you have had multiple rejections.
What does a loan guarantor need to have?
The details covering most of what you need is listed above; though the key items are:
- Affordability via a regular income
- Good credit history
- Aged between 18 and 75 years, a UK resident with a UK bank account and debit card
From a real-world point of view, it is also useful to have a good relationship and trust with the borrower.
What is a guarantor liable for?
You will be liable for the full balance of the outstanding loan from the time the borrower stops paying, also including any interest and fees. This is the same liability as if you had taken the loan yourself, even though you have not enjoyed the benefit of the money.
You should therefore be able to meet the full loan repayments on top of all other existing financial commitments. If you do not, you are subject to the same implications as if you had defaulted on an unsecured loan that you had taken out yourself.
Can being a guarantor affect your credit rating?
If loan repayments are missed, this will affect your credit file and potentially 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.
Note, also 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.
Does being a guarantor affect your ability to get a mortgage?
It is possible that mortgage brokers and lenders will consider potential loan payment that you could be liable for as the loan backer. The mortgage lender may therefore need to be satisfied that you can afford the mortgage as well these loan repayments.
So, there is a possibility that this could reduce your affordability for a new mortgage and the amount you could borrow. If you are considering a mortgage, we suggest you take professional independent financial advice prior to signing the guarantor agreement.
Apart from this, so long as you have a clean credit file, taking on this responsibility should not affect your mortgage eligibility.
Will being a guarantor affect me getting a loan?
As just discussed above, there are some lenders that may consider your potential loan payments as a guarantor when assessing your loan affordability, and the amount they will lend you. So, it is possible that this could reduce the credit available to you, so you should therefore consider your own needs for credit first.
Can you be a guarantor with bad credit?
Typically, lenders will only allow loan backers with a good to marginally imperfect credit score. If your credit score is not good, it is unlikely that the application will 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.
What happens if a guarantor refuses to pay?
If you refuse to pay, the consequences can be the same as if you defaulted on a loan you’ve taken out yourself:
- Damaged Credit File - missed payments will show up on your credit file, which could impede your ability to obtain future credit, although the more payments that are missed the greater the impact.
Fees & Penalties - some lenders may charge fees as a penalty for missed payments, and this will obviously increase the debt that needs to be paid back and the overall burden on the borrower and you. Fees and charges vary from lender to lender. Make sure you find out the exact rates before the loan is taken out, so you are aware of potential additional expenditure.
If the money is paid within a month of the order, the CCJ does not appear on your credit file. But if the amount is not paid, the CCJ will show for the next six years severely affecting your opportunity to get credit (even a mobile phone contract). If affordability is the issue, then the Judge may propose a payment plan, though the CCJ will still show up on your file.
- County Court Judgement (CCJ) - Depending on your lender, after a certain number of missed payments they may apply for a CCJ for both you and the borrower. This is where you attend Court and if the Judge agrees that you owe the money, they will order it to be paid.
- Bankruptcy - If any payments ordered by the CCJ are not met, it is possible the lender may apply for bankruptcy. This is not common for anything other than larger loans. So, whilst the possibility of you being made bankrupt is highly unlikely, you should understand that this is the very worst case.
Can I change my mind about being a guarantor?
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 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.
Is there any benefit to me by being a loan backer?
The benefit to you is that you are helping a friend or family member access credit when they otherwise may be unable.
The guarantor loan is typically the most affordable type of loan for people with poor credit, with representative APRs typically ranging from 29% to 55%. Compare that to other bad credit loans with APRs ranging from 135% to over 1,000%. So, by becoming a loan backer you are helping someone potentially save a great deal of money.
How do I know if the borrower will repay the loan?
The short answer is you do not know.
However, your relationship with the borrower and the steps they take to make you feel comfortable should help you to decide if they will repay or not. For example, they should be able to tell you:
- why they want the money and what they are going to use it for
- what income they have available to make the repayments
If they have taken time to show you that the money will be sensibly used, and they have the income to cope with the repayments, then this may make you feel more comfortable.
Been asked to be a guarantor but unsure?
When someone asks you to do this, especially if you are close, then there may be pressure to say yes. If, however, you are not comfortable then this is something you should not do.
Once you have signed the guarantor agreement, it may be impossible to have your name removed until the loan agreement has been paid back.
To help build trust, ensure the borrower only gets a loan for the amount they need – i.e. if they need £1,000 they do not take a loan out for £2,000. Also, ensure they can comfortably afford the repayments – we would do this by using our loan calculator to estimate the repayments, plus use the Citizens Advice Bureau’s Budget Sheet to map out their income and expenditure.
You could be really helping someone out by enabling them to get them the credit they may desperately need.