Does Getting a Guarantor Loan Affect Your Credit Score?

Updated: December 04, 2023 Author:

Quick answer: Any loan has the potential to affect your credit score. If you default on repayments then this will negatively affect your credit score. Likewise, if you meet your repayment schedule and pay the loan off in full, your credit score can improve. 

    What is a guarantor loan?

    Guarantor loans are just like any other form of loan in that you have to approach a lender, except that you will do so with the security of having a guarantor. This is typically a family member with a better credit score and financial history who underwrites your repayments. In the event that you are unable to pay, they become liable for the repayments. Loans of this type are a way for those with poor credit to still borrow money for key life events. 

    How can you use a guarantor loan to improve your credit score? 

    Repaying the amount you have borrowed on time will show credit ratings agencies and lenders that the risk of lending to you has reduced. This could help improve your credit score and give you access to future borrowing opportunities at lower interest rates. 

    The key is to only borrow what you know you can afford to repay, and to be open at all times with your guarantor about your financial situation. That way you give yourself the best possible chance of meeting your monthly repayments and building your credit score back up. 

    Will a lender run a credit check on me when I apply for a guarantor loan? 

    Yes, in the vast majority of cases a lender will run a full credit check to ascertain your risk profile, regardless of the fact you are being backed by a guarantor. This is to calculate the interest they will charge you to balance the risk they are taking. It’s important to note that applying for multiple loans of this type in a short space of time can potentially affect your credit rating. 

    How much can you borrow before your credit score is reduced? 

    This will depend largely on your individual circumstances, current credit profile and your ability to repay what you intend to borrow. By only borrowing what you know you can afford to repay, you can build a history of meeting repayments while also securing the money you need in the here and now. 

    Will my guarantor’s credit score be affected? 

    Acting as a guarantor is unlikely to have any impact on a person’s credit score, provided the main borrower meets all of their scheduled repayments. In the event the borrower defaults on a repayment, the guarantor will become liable to repay the loan. 

    While this will not automatically reduce the guarantor’s credit score; the new debt they have taken on will form part of their credit profile. This means there is the potential for a large level of debt to reduce a guarantor’s credit score at some point in the near future.