For millions of Brits, securing a conventional bank loan is a task made virtually impossible by the burden of a poor credit rating. Guarantor loans offer an alternative borrowing method by co-opting a third party who agrees to repay outstanding debt should the borrower default on the payment schedule.

The Basis


In the UK, the quick-fix loan market is largely dominated by high street payday lenders which raise brand awareness through high profile TV ad campaigns. Despite their popularity, borrowing from these companies carries some significant risk, with many having come under scrutiny in recent years for their inordinately high interest rates as well as allegedly heavy-handed collection methods. In general, services like these should be regarded as a very last resort (and even then should not be rushed into without careful forethought).


Guarantor lenders favour longer term schedules, with several prepared to support loans of up to £12,000 as compared with the mere £500 to £1,000 typically offered in payday deals. This also means lower interest - an average APR (annual percentage rate) of 50% - which is far from insignificant but at least manageable for the average borrower. For context, some payday companies have been reported to charge up to 1,000%, a jaw-dropping figure which can leave the most vulnerable customers close to financial ruin. By using a guarantor service, you also escape that slightly threatening atmosphere associated with high street loan sharks, the presence of a reliable third party helping to cultivate a much more amicable relationship between lender and borrower.


So, what do you need to do?


First, there is the matter of finding a suitable guarantor to co-sign the contract. Since lenders do not explicitly demand that this person be a close personal associate, you are free to ask any acquaintance - be they a family member, friend or even co-worker - to support your application. Of course, whomever you choose has to be able to keep their end of the bargain in the event that you default, so there are some basic requirements. Namely, they must have a positive credit rating and their personal finances must not be in any way tied to yours (this would rule out a significant other or business partner). Many companies also ask for your guarantor to be a home-owner.

In case you are a guarantor you must be aware that if the borrower is not paying and fail the loan/mortgage, that will be recorded in your credit history and will lower your credit score down.  And if the guarantor refuses to pay the loan, then the lender has the right to start a legal order to retrieve the payments.


Interest rates


When it comes to choosing the right lender, the main factor to consider is of course the interest rate - for which there is typically little variation between different companies, lending and borrowing power being inseparably interwoven with the national economic climate. Still, it pays to shop around before committing. Currently, UK Credit and GuarantorLoansUK offer an APR of 29.9% - the lowest found on the UK market - though in the case of the first one, loans are capped at £12,000 (the other permit borrowings of up to £15k). You should also take note of which packages reserve the option to impose late payment penalties, as your financial position may undergo change during the interim period, leaving you unable to keep pace with the agreed schedule.


Though they are not exactly cheap - an APR of 40 or 50% should not be taken on lightly - guarantor loans provide an invaluable service for low income customers in search of a quick solution to cash-flow problems. The insurance offered by a third party affords users the breathing space of a larger borrowing amount as well as a more sustainable repayment schedule. And, provided you are able to repay the loan by yourself and without any major delays, you will also be improving your overall credit score in the process.


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