Guarantor loans are a form of unsecured debt which – as the name suggests – require someone to co-sign your loan application, acting as a guarantor and agreeing to make repayments if you’re unable to. Generally, guarantor loans are for between £1,000 and £15,000 and are designed for people with poor credit; as a result, they come with higher interest rates than a standard loan, anywhere from 40% to 70% APR.
How do guarantor loans work?
Guarantor loans work in much the same way as other loans apart from the need for a guarantor to co-sign. You apply online or in person to your lender, they review your credit history as well as that of your guarantor and let you know if you’re approved; if you are, money is transferred to your bank account, normally within 24 hours. Loans are generally for between one and five years. Your guarantor needs to have good credit in order for you to be approved, have a regular income, and many lenders require them to be a UK homeowner.
If you fail to make loan repayments your guarantor will be liable for covering your debt. However, before they’re contacted, your lender will get in touch with you to try and arrange a repayment plan. Contacting your guarantor is considered a last resort.
Why take out a guarantor loan?
Most people take out a guarantor loan because they have bad credit and are unlikely to get approved by a mainstream lender, or – if they do – won’t get approved for the full amount they need. Alternatively, people might be looking for a loan that mainstream lenders might consider risky, to start up a business, for example.
Just like with other loans, a guarantor loan will appear on your credit file. If you make repayments on time, you’ll improve your credit rating, making it easier to take our a more traditional loan in the future.
Alternatives to guarantor loans
While guarantor loans are a great option for some people, they don’t work for everyone, and not everyone can find someone willing to co-sign their application. Thankfully, there are alternatives:
1. Non-guaranteed unsecured loans
If you have bad credit, you might assume that you’ll need a guarantor for your loan application. However, this isn’t always the case. Before you apply for a guarantor loan, check your credit score and complete a soft search on the website which will give you a good idea of whether you would be approved without impacting your credit score.
If you do get approved for a standard unsecured loan, remember you might still need to pay a higher interest rate than the advertised representative APR.
2. Payday loans
Payday loans are another form of unsecured debt which might work if you only want to borrow a small amount of money and don’t have anyone to co-sign your loan application. However, they tend to have higher interest rates than other forms of loans, so aren’t necessarily the best option.
Payday loans are seen by some lenders as a sign that you aren’t managing your money well. If you apply for credit in the future, having taken out, payday loans may count against you so think carefully before applying for one.
3. Credit Union loans
Credit Unions are not-for-profit lenders who offer smaller loans at low-interest rates (capped at 3%) and, while they are for anyone, are especially helpful for people on low incomes or with bad credit. With credit union loans you can pay back weekly, making it easier to manage your money.
You will need to be a member of a Credit Union before you apply for a loan. Some have restrictions, e.g. you have to work in a certain sector or live in a specific area, so make sure you understand these before looking to join.
4. Secured loans
If you are a homeowner or have property, such as a car, which you can borrow against, you might be eligible for a secured loan. Lenders see secured loans as less risky as, if you don’t make repayments, they can cover the debt by making a claim against your property, something you need to consider before making an application.
Because your home or property is at risk if you don’t make repayments, you might not want to take out a secured loan unless you are looking to lend at least £10,000.
5. Credit cards
Depending on how much you need, you may be better off using a credit card to cover the costs. If you have existing credit cards, use the one with the lowest interest rate or see if your lender will offer you 0% on purchases for a period of time. If you don’t have a credit card and have poor credit, you might need to apply for what are commonly called ‘bad credit’ cards. These have higher rates of interest, but you are likely to be approved.
A ‘bad credit’ card can help you rebuild your credit rating so, even if you plan on taking out a guarantor loan, taking out a ‘bad credit’ card as well might not be a bad idea if you can cover any repayments.