Guarantor Loans

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What is a guarantor loan?

A guarantor loan is tailor-made for individuals who, perhaps, are not able to take out a loan on their own merits due to their financial position or credit rating. Instead, they need to ask a family member or friend to be a guarantor. This means that if the guarantee defaults on the loan, the guarantor will have to repay the bank or lender. 

Who can be my guarantor?

A guarantor can be anyone who is not financially connected to you. So no partners or spouses. They must also meet or have the following criteria:

  • Aged between 21 and 75
  • Own their own home 
  • Have a strong credit record 
  • Have a UK bank account 
  • Earn an income, whether employed, self employed or pension
  • Give their full consent to act as guarantor and understand the commitment they are undertaking

What are the criteria for a borrower to apply for a guarantor loan?

This will depend on the lender, but generally the borrower will need to be over the age of 18 and hold a UK bank account. They will also need to demonstrate that they can afford the repayments through their salary. 

How much can you borrow using a guarantor loan?

The general market offers guarantor loans of anywhere between £1,000 and £15,000.

How much interest do you pay on a guarantor loan?

The interest depends on the lender, but traditionally it is between 39.9% and 59.9%. As the guarantor loan market is not subject to the same controls as other types of loans the interest rates are high. 

What should you consider before asking someone to become a guarantor?

Being a guarantor is risky. Remember that if you fall behind on your repayments the guarantor is then liable to repay the loan. If this situation occurs and it is something the guarantor is unable to fulfil, they may find that their credit history will be affected. This would negatively impact their future financial options such as applying for a loan themselves, credit cards or a mortgage. 

Therefore, before asking a guarantor for security on the funds you’re looking to borrow, be sure to consider the following:

  • Why do you need a guarantor? 
  • Would your guarantor be willing, and able, to pay back the loan if the borrower is unable to do so?
  • Are you willing to risk your personal relationship with this person, should the agreement not end well?

How can you protect the relationship? 

[In the PDF version instead of the above title there is a title of “How much interest do you pay on a guarantor loan?”]

With a guarantor loan, it is important to safeguard everyone’s rights as much as possible. By having the following in writing you are doing your part to keep the arrangement clear and professional: 

  • The amount of money for which the guarantor is liable
  • The circumstances in which a guarantor would have to pay 
  • How long your obligation will last 

What is the guarantor’s responsibility?

If an individual defaults on their loan, a guarantor will have to pay back the loan and risk having their own home repossessed if they don’t have the liquid assets available to do so. 

What are the advantages of a guarantor loan?

  • Opening up the market: for some individuals who don’t have a good credit rating, a guarantor loan may well be the only way of borrowing money, allowing them access to more opportunities that would otherwise not be available.
  • Improving your credit rating: if the guarantor loan is paid back on time and within the terms set, it can be a good way of improving a poor credit rating or building up a non-existent one. 
  • Speed: having a guarantor means loans can be approved quicker, in some cases within 24 hours. 
  • Longer terms: this can be anything up to five years. 
  • You can borrow more: given that you have a guarantor a bank may feel far more comfortable offering you more money than would otherwise be available.  

What are the disadvantages of a guarantor loan? 

  • Ramifications: As with any loan if you fail to make the payments both you and your guarantor may be taken to court. 
  • Relationships: If you are using a friend or family member as a guarantor it is worth considering the emotional impact this may have on your relationship. You will need to have complete trust in each other and more specifically, the guarantor has to trust that you will repay your loan.
  • Interest rates: Interest rates for this type of loan can be incredibly high and you are not guaranteed to receive the advertised rate. 
  • Helping a loved one: A guarantor loan can allow a family member or friend to help you out, even if they aren’t able to give you the money themselves. 

Will I be charged for an early repayment?

This depends on the lender so it’s important to check the terms and conditions. However, it could well be that there is an early redemption charge on your loan.  

What are homeowner guarantor loans?

Homeowner guarantor loans were the original form of guarantor loan as they proved to be a viable way of ascertaining the financial standing of an individual. However these days, this is not necessarily a requirement; although it can help to encourage a lender to offer a preferential rate. 

What are non-homeowner guarantor loans?

Non-homeowner guarantor loans are loans that you can get even if you or your guarantor do not own a property; also known as tenant guarantor loans, these types of loans have only been around for a short amount of time, but can prove hugely beneficial if you do not have a guarantor who owns a property. Not all lenders accept non-guarantor loans so it may require some research to understand which lender is appropriate for you. 

Is a guarantee still enforceable after the death of a guarantor?

In the regrettable circumstances that a guarantor passes away, the lender may be able to lay a claim to their estate to recover some of the debts. 

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