Guarantor loans generally function similarly to other loans: you have a borrower who borrows the money and a lender who provides it. Then, there is a third entity – the guarantor. This is a person who legally agrees to pay back the borrowed money if the borrower doesn’t or can’t pay themselves.

Ideally, this never happens. In an ideal arrangement, the borrower pays the lender back after an agreed period and the guarantor never has to worry. However, if the borrower doesn’t pay back the funds, then the guarantor is legally required to pay back the loan. That means if you’re a guarantor, you could get stuck paying for someone else’s debt.

Getting a guarantor can increase the likelihood of you getting a loan or accessing more funds. However, it can also cause a great deal of financial strain on the guarantor if the borrower isn’t trustworthy.

Guarantor loans are a more accessible type of loan, but you will need to meet some basic criteria:

• Applicants must be over 18 and a UK resident.
• To apply, you need to hold a UK bank account.
• You must receive a regular income.
• Potential borrowers should be able to prove they can make repayments.

Remember: You should only apply for a guarantor loan if you are confident that you can meet the repayments on your own. Relying on a guarantor should be a last resort for the lender's security, not a primary way to manage the debt.

Guarantor loans can be highly beneficial for borrowers, with several advantages over traditional unsecured loans:

• No homeowner requirement: To get a guarantor loan, you do not always need to be a homeowner.
• Higher borrowing limits: Allows borrowers the opportunity to access amounts of money that they might not qualify for on their own.
• Bad credit accessibility: Provides access to finance for borrowers with a limited or poor credit history.
• Favourable terms: In some cases, guarantor support can lead to more manageable loan terms compared to high-interest short-term credit.
• Credit building: Successfully managing a guarantor loan could increase your credit score, making it easier to get credit on your own in the future.

The risks involved

With guarantor loans, many of the downsides are felt by the guarantor:

• Legal liability: Guarantors are liable for the outstanding loan balance if the borrower fails to pay.
• Credit risk: As a guarantor, missed payments by the borrower can negatively impact your own credit score.
• Reduced borrowing power: Acting as a guarantor may reduce the likelihood of you securing loans for yourself, as lenders view the guarantee as a potential financial obligation.

Disadvantages for the borrower include potential relationship risks if financial difficulties arise. Guarantor loans can also come with higher interest rates, as the borrower is still seen as a higher risk to the lender.

Loans with a guarantor may allow you access to finance with poor credit, but they can put friends and family at financial risk. For that reason, and the personal strain it can bring, some people may choose to explore other options. Before signing up, you should learn everything there is to know about borrowing with a guarantor so you’re prepared for what it might entail.

If a guarantor loan isn’t right for you, there are other loan types available, even for those with poor credit or no major assets to use as collateral:

• Bad Credit Loans: These can provide access to funding in a pinch and, if repayments are made on time, boost your credit score in the long term. However, rates may be higher and options fewer.
• Unsecured Loans: Personal loans don't require a guarantor or assets for security. While approval depends on your credit score, they allow you to borrow without leaning on anyone else’s finances.

While most people can act as a guarantor, they should be someone you trust – usually a family member or friend. They generally need to be over the age of 21 with a favourable financial history. If your guarantor is your partner, they usually cannot be tied to you financially through joint accounts or a mortgage.

Finally, a guarantor must be able to afford the loan repayments if the borrower defaults. Your guarantor will need to pass a series of checks, and homeowners are often preferred by lenders for this role.

Guarantor loans can be more expensive than standard bank loans because they are classified as high-risk. In some instances, borrowers could be faced with APRs as high as 50%. While this is higher than a secured loan, it can sometimes be lower than the rates found on certain emergency bad-credit products.