Do you need a guarantor?

If you’re struggling to be accepted for a loan because you have a poor credit record, you may consider applying for a guarantor loan. These are loans that you take out with the help of a close family member or friend who is willing to repay the loan if you are unable to do so for any reason. Getting a loved one involved in your personal finances isn’t for the faint-hearted, however. You must be open and honest with your guarantor. Your guarantor should understand what is involved and the responsibilities they are taking on. This guide will help you and any potential guarantor to understand what is a guarantor for a loan and what you need to consider before going down this route.

What is a guarantor loan?

A guarantor loan is a loan taken out by a borrower and a guarantor, who is usually a family member or a close friend. Guarantor loans can help borrowers who are struggling to find a lender who will offer them a loan because of their poor credit history. Some lenders will offer these borrowers loans providing they have a guarantor who will pledge to repay the loan on the borrower’s behalf if they can’t repay.

Lenders are more willing to lend to bad-credit borrowers who have guarantors as they back up the borrower and become responsible for repaying if the borrower fails to stick to the credit agreement. This removes much of the risk involved with lending to people with poor credit scores.

A guarantor loan is usually only available from particular lenders and there are requirements on those taking out guarantor loans.

What is a guarantor?

A guarantor is an external party who commits to repaying the full loan amount in the event that the borrower is unable to do so. By guaranteeing the agreement, the guarantor becomes responsible for any outstanding payments the borrower is unable to pay.

Quick look - what are the criteria for guarantor loans?

Who can borrow a guarantor loan?

To be able to apply for a guarantor loan, you must be:

• Over 18 years old

• Have a UK bank account

• Be employed (usually full time)

• Have a steady income

Although guarantor loans may be useful if you have a poor credit rating, you won’t be able to use them to get a loan if you are unemployed, self-employed or a student, for example.

Who can be a guarantor?

To become a guarantor, you must be:

• Over 21 years old

• Employed or have another source of income

• Understand responsibility

• Have a UK bank account

• Have a good credit rating

• Have no current financial link to the borrower

• Be a homeowner (depending on the type of loan)

How much does a guarantor need to earn?

You might also be wondering, ‘How much does a guarantor need to earn?’.

There is no specific amount that a guarantor must earn in order to qualify as a guarantor for the loan you’re seeking to borrow.

What do you need to be a guarantor on a loan?

The lender may request to see proof of the guarantor’s income and savings, and this information will likely factor into their decision as to whether to lend to the borrower or not. This step is taken to determine whether the guarantor is financially secure enough to cover the loan, in the event the borrower is unable to do so.

How to get a guarantor?

To get a guarantor, you will first need to ask someone you know – usually a friend or family member - if they are willing to be the guarantor on your loan – i.e. agree to repay the loan if you are unable to. It’s important to choose someone that you trust and feel comfortable discussing your finances with.

They’ll need to meet the requirements listed above. You’ll also need to submit their personal and financial details as well as your own. The lender will carry out a series of check during the application process to determine whether the person you’ve chosen is a suitable guarantor.

Do I need a guarantor to get a payday loan?

It depends on the lender as to whether you will need a guarantor’s signature and approval for the loan you’re applying for. At Moneyboat, you do not need a guarantor to apply for a payday loan, but it’s important to remember that we will still take other assessment criteria into consideration during the application process.

Many payday loan and short-term loan lenders will offer loans to those with less-than-perfect credit histories. Just because you’ve been turned down for a loan in the past, it doesn’t mean you won’t be able to secure a credit deal with an alternative lender operating online.

This is because online lenders, and particularly those operating in the short-term lending industry, work on different business models and have the autonomy to be more flexible in their lending decisions. Large high-street banks traditionally make their lending decisions purely using algorithms, so there’s little or no wriggle room for discretion.

However, online lenders and smaller loan companies will often look at more factors when deciding whether to approve a loan application. For example, if you have a poor credit rating, but you’re in steady employment and earning a decent salary, a bank may still have turned you down for a loan, while an online lender will look past your credit problems and base their decision more on affordability.

Advantages to using guarantor loans

They can help you secure a loan when you’ve been turned down before

For those looking for a longer-term loan or a loan totalling more than a few hundred pounds, a guarantor loan could be a good option to explore if they have bad credit.

They can act as a stepping stone to a better credit rating

If you take out a guarantor loan and repay on time, your credit rating will improve, which can help you to secure credit in the future without the use of a guarantor.

You may be able to borrow more and repay over a longer period

When a lender has the security of a guarantor on board, they are likely to be more open to offering you a larger loan and repayments stretched over a longer time. Although this can lead to a more expensive loan in the long run so make sure you can afford the repayments.

Disadvantages to using guarantor loans

Risks your relationship with your guarantor

If you take out a loan with a guarantor and fail to make repayments, your guarantor is legally obliged to make the repayments on your behalf. They are likely to be disappointed in this situation and they could also find themselves in financial trouble.

They are more expensive than standard loans

When you take out a guarantor loan, you are not likely to be getting as favourable interest rates as you would when taking out a standard loan. This is because the risk involved for the lender is still higher, so they need to offset this risk with higher rates.

Not suitable unless you’re employed

Lenders of guarantor loans usually require that the borrower is employed, usually in a full-time position, so they are of limited use to anyone who is struggling to get a loan based on their employment status.

Risky for guarantor

The guarantor risks court action and even risks losing their home if they become responsible for paying off a loan, which they themselves then struggle to pay off.

What you need to be aware of before becoming a guarantor

If you are considering acting as a guarantor for a loved one who has been turned down for a loan, ask yourself the following questions:

• Do I trust this person to try to make the repayments themselves?

• Can this person afford the loan?

• Is this person borrowing for the right reasons?

• If I need to repay the loan, can I afford it?

• If my financial situation worsens, will I still be able to afford the repayments?

• Am I risking putting myself into financial difficulties by acting as a guarantor?

• Homeowner credit risk

Some lenders will require a guarantor to be a homeowner and the loan is secured against the guarantor’s home. This is a particularly risky type of guarantor loan and should be treated with caution. If the borrower fails to make repayments, and the guarantor also fails to repay the debt, the lender could order the sale of the property to repay the loan.

If you decide to apply for a guarantor loan, make sure you and your guarantor are both clear on what is expected of you. Have open discussions about what will happen if you, as a borrower, are struggling to make payments, and make sure your guarantor is happy with everything included in the credit agreement.

If you decide not to go ahead, remember, you may be able to secure a smaller, short-term loan through a payday loan direct lender without the need for a guarantor.