What is a guarantor on a loan? (and do you need a guarantor to get a payday loan?)

If you’re struggling to be accepted for a loan because you have a poor credit record, you may want to consider 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. 

Quick look – what are the criteria for guarantor loans?

Requirements for borrowers:

  • Over 18 years old
  • Has a UK bank account
  • Is employed (usually full time)
  • Has a steady income

Requirements for guarantors:

  • Over 21 years old
  • Employed or with another source of income
  • Understands responsibility
  • Uk bank account
  • Good credit rating
  • No current financial link to borrower
  • Homeowner (depending on the type of loan) 

So, 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. 

Do I need a guarantor to get a payday loan?

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. 

But guarantor loans can be useful if you need more time or more money…

Although you’re unlikely to benefit from guarantor loans when you’re on the search for a payday loan, if you’re in the market for a longer-term loan or a larger loan, guarantor loans might be worth considering.

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. 

Looking for a direct lender loan on a realistic payback schedule?

Warning: Late repayments can cause you serious money problems. For help, go to moneyadviceservice.org.uk

Representative Example: Borrow £400 for 4 months, four monthly repayments of £197.48. Total repayment £597.48, interest rate p.a. (fixed) 255.5%. Representative APR 939.5%. Compare Moneyboat loans.

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