The key difference between a guarantor loan and other types of loan is that you need a third party – typically a family member or friend – to “guarantee” to pay off the debt if you can’t. The mechanics of the loan are the same as with other types: you borrow money from a lender then pay it back in instalments, which include interest.

Guarantor loans are designed for those who may not be eligible for standard loans because they have a poor or no credit history. Lenders are more likely to grant this type of loan to those with bad credit because it reduces their risk – if the borrower defaults at any time on their repayments, the guarantor steps in to pay back the loan. This is the case even if the borrower is declared bankrupt. 

Bear in mind that the interest on guarantor loans is often extremely high, typically with a representative APR of between 30% and 50%. 

Debt charity StepChange warns that this means you could end up paying back more than double the amount you borrowed over the period of the loan.

Guarantor loans are designed for those who may not be eligible for standard loans.”

To qualify for a guarantor loan, you typically need to be:

• Age 18 or older

• A UK resident, or have a UK bank account

• Have a regular income

• Able to demonstrate that you can pay back the loan

Some lenders also require you to

• Have a minimum level of income

• May also have a maximum age limit based on how old you will be when you finish paying back the loan.

Many lenders will also say

• You cannot be subject to a current Individual voluntary arrangement (IVA) or bankruptcy order.

A guarantor needs to be someone who is willing to support you and is:

• Someone who knows you well

• Aware of the responsibilities of a guarantor

• Typically age 21 or older

• Younger than 75 at the end of the loan term

• In receipt of a regular income (a wage or pension)

• A UK resident

• A separate UK bank account and debit card holder from the loan applicant

• A UK bank account and debit card holder

• Able to afford the monthly payments if you can’t

• Someone with a good credit record

Some loan providers have stricter rules and may also insist that your guarantor is:

• A homeowner

Since the lender is taking more risk by lending to a borrower with bad credit, interest rates are typically higher on guarantor loans than on regular personal loans.

The interest rate charged will depend on your specific circumstances and can vary significantly – usually between about 30% and 50% APR.

The interest rate also depends on your lender and can fluctuate over time. You can usually borrow for a period of between three months and five years, depending on the lender.

You can usually borrow between £500 and £12,500, perhaps more depending on your and the guarantor’s circumstances."

Before agreeing to be someone’s guarantor, it’s vital to be fully aware of what’s involved and the potential repercussions. If you’re in doubt, seek legal advice. Here are a few useful tips:

Make a written contract

Write out a simple written contract with the borrower stating how you want to communicate, how often you want to receive updates, and in what circumstances they should get in contact with you.

For those who are having trouble keeping up with debt payments, it's really important to seek help. The first step is to speak to your lenders and see if you can work out a manageable payment plan to reduce your debt.

If that doesn’t work, there are debt charities you can contact that offer free debt advice to help you get out of debt. For free debt advice contact StepChange, Citizens Advice or the National Debtline.

FAQs