A guide to securing guarantor loans
7 min read
09 November 2017
Worth £400m in the UK, the guarantor loans market is growing and funding essential and life-changing purchases. Here's how they work and how to apply.
Guarantor loans allow individuals to borrow up to £15,000 with the help of an additional person to “co-sign” their loan agreement and provide extra security.
This type of finance is popular for those with bad credit and who may have been turned down by mainstream banks and lenders. By leveraging the better credit score of their guarantor, they are able to get the finance they need. However, should their loan default, the guarantor is contracted to repay the outstanding debt on their behalf.
Applicants can borrow between £500 and £15,000 (depending on the lender) and this is repaid in equal monthly instalments over 12-84 months (one to two years).
If the main borrower makes regular repayments, the information is reported to the three main credit reference agencies in the UK (Experian, Equifax and Call Credit) and therefore can cause the borrower’s credit score to improve. Essentially, being a guarantor allows you to help someone get the funds they need but also demonstrate their creditworthiness and get back on their feet.
About the guarantor loans industry
The guarantor lending industry is worth an estimated £400m in the UK and has been regulated by the Financial Conduct Authority (FCA) since 2015. There currently around 15 active guarantor lenders in the UK, with Bournemouth-based Amigo Loans being the largest guarantor lender and responsible for issuing over 250,000 loans since it was founded in 2005.
Other large lenders include Norwich-based UK Credit, London-based Bamboo Loans and Buddy Loans based in Cheshire.
The main purpose of guarantor loans is to fund essential and life-changing purchases including a new car, wedding, home improvement, school fees and also debt consolidation. Guarantor products can also be used for business purposes as individuals look for seed capital or need money to improve their cash position.
Who could be a guarantor?
A guarantor is typically someone that the main borrower is very close to and is able to speak openly with regarding their finances. The most common guarantors include spouses, siblings, parents and close friends or relatives. Since the loan term can last as long as five or seven years, depending on the lender, you therefore need someone who you are still going to be in contact with long-term and not just a causal friend or work colleague.
Approval rates tend to heavily favour those guarantors who have a good credit rating because it means that they will be more likely to repay the loan if it defaults. In addition, being a homeowner means that the lender gets extra security because they have probably already been through the rigorous checks involved with applying for a mortgage and can always raise finance by selling their home or getting a second mortgage.
For this reason, there are some lenders that only lend exclusively to those with homeowner guarantors (Guarantor My Loan and TFS Loans) and some that can lend to both homeowner and tenant guarantors (Amigo, Buddy, Bamboo and UK Credit).
What are guarantor loans costs?
The cost of guarantor loans range from a representative APR of 39.9 per cent to 59.9 per cent. This works out to around 0.1 per cent per day, which is significantly less than the price cap for payday lending at 0.8 per cent per day.
The rate you are charged depends heavily on the quality of your guarantor, with strong credit scores and homeowner statuses likely to be closer to being charged the 39.9 per cent, but tenant guarantors being closer to the 59.9 per cent representative APR.
All guarantor lenders allow you to repay your loan early and in doing so, you will be eligible for a rebate of interest or charged only for the days that you have had the loan open for (minimum is 12 months).
What happens if you cannot repay?
There is a common misconception that as soon as the main borrower misses a repayment, it automatically comes out of the guarantor’s bank account. This is not the case.
The main borrower will always be contacted in the legal number of ways to help recover their repayments. If they are struggling to keep up, the lender may offer flexibility such as pay plans or an extended repayment period.
It is only once all resources have been exhausted and the borrower cannot pay any more, does the guarantor get contacted and asked to contribute to repayments. This is especially the case if the individual goes AWOL and is uncontactable.
Things to consider before applying
- All parties involved must understand their responsibilities when co-signing a loan agreement. For the guarantor, they could be expected to pay for a loan, even five or seven years later
- There are certainly cheaper alternatives available. For instance, if you are involving a family member or friend, it could be far more cost-effective to borrow from their directly. Also, there is the option of a local credit union which offers very low fees if you are a member
- Individuals must have a plan on how they are going to repay their loan. Whether it is through savings, income or inheritance, you need to budget otherwise there are extra fees involved and your guarantor will be liable for your payment