Guarantor Loans for Bad Credit

Updated: June 25, 2024 Author:

Key takeaways If you have bad credit, it can be difficult to get approved for a loan. A guarantor loan can be an easier option when you cannot get approved for a personal loan.

What is Bad Credit?

When applying for a loan, lenders look into many aspects of your credit history to determine how likely you are to repay the money you borrow – in other words, how risky it is to lend their money to you.

If you have a history of missed or late payments, this will appear on your credit record. This may result in a poor credit score and “bad credit”.

Bad credit can make it more difficult to get approved for a loan. However, there are some types of loan which can be easier to get approval for – even if you have a bad credit rating.

A guarantor loan, for example, may be a good option when you cannot get approved for other types of loan due to poor or no credit history.

What is a Guarantor Loan?

A guarantor loan is very similar to a personal loan. You’ll pay it back in monthly instalments over an agreed term, plus interest, and it may be secured or unsecured. If the loan is secured, this means it is tied to your assets – usually, any property you own – which can be recovered if the loan is not repaid.

The difference between a personal loan and a guarantor loan is that a third party agrees to repay the loan if you don’t. If the loan is secured, the loan is tied to their assets instead of yours.

This person is called the “guarantor”, and they assume responsibility for the debt if you’re unable to pay it back on time. The guarantor will also need to undergo a credit check, and should have a good credit rating for the loan to be approved.

The loan is usually paid directly to you, although some lenders pay out to the guarantor first. The guarantor then has a 14-day “cooling-off” period, during which they can decide to give the money back to the lender or to give it to you.

How Can a Guarantor Loan Help with Bad Credit?

Because this person acts as a safety net for the lender, it can be easier to get approved for a guarantor loan if you have already been rejected for a personal loan.

This is because the guarantor has agreed to repay the debt if you aren’t able to. Since the guarantor should have a good credit history, the lender assesses that the loan is more likely to be paid back and assumes less risk.

Who Can Be My Guarantor?

Your guarantor does not have to be a parent or family member, but they can be. 

Your guarantor should be somebody you trust, and somebody you can discuss your finances with. This is likely to be a family member or close friend.

Lenders have different requirements for guarantors, but they usually include:

  • The guarantor must be between 21 and 75 years old.
  • They must be a UK resident.
  • They must have a UK bank account.
  • They must have a regular income.
  • They cannot be financially connected to you (you must have no shared financial accounts and they cannot be your spouse or civil partner).
  • They must have a good credit rating.
  • They must not have declared bankruptcy over the past 6 years.
  • Some lenders stipulate that guarantors must be homeowners.

As well as undergoing a credit check, guarantors will be expected to provide their proof of ID, bank details, and bank statements.

What Do You Need to Get a Guarantor Loan?

You don’t need to meet the same requirements as your guarantor, but you will still need to fill certain criteria. These are usually:

  • You must be over 18.
  • You must be a UK resident.
  • You must hold a UK bank account.
  • You must receive a regular source of income.
  • You must be able to prove that you have a plan to make your repayments as scheduled.

And, of course, you will need someone willing to act as your guarantor.

What are the Pros of a Guarantor Loan?

Like all loans, there are advantages and disadvantages to guarantor loans.

If you have a poor credit history or no credit history at all, guarantor loans may be easier to get approved for than other types of loan. They can also help you to build up your credit score if managed well and repaid on time.

Guarantor loans also benefit from fast payments, with many typically paid out within 24 hours of approval.

What are the Cons of a Guarantor Loan?

You and your guarantor are both making a significant financial commitment, and you both need to be able to be open with each other about your finances. You need to be able to trust each other to manage the debt correctly.

If your guarantor does have to make a payment on your behalf, this could negatively impact your credit score.

If your guarantor is unable to pay back the loan if you default, the provider may take legal action to recover the funds. If the loan is secured, the guarantor may be at risk of losing their property.

Finally, due to the increased risk to the lender associated with guarantor loans, interest rates on guarantor loans tend to be very high. This means you’ll typically pay back more over the same period of time than you would for a personal loan.

Is a Guarantor Loan Right for Me?

If you’re confident that you can repay the loan as agreed and have someone you trust willing to act as your guarantor, then you could consider a guarantor loan. Guarantor loans are generally considered a safer option than other bad credit loans, such as logbook loans or payday loans.

However, if you’re not sure whether you’ll be able to repay the loan, you may wish to consider other options. The safest way to manage your finances is to cut back where you can, and try to stay on top of any existing debt to protect your credit history.