If so, a guarantor loan might be an option worth looking into. With this type of loan, the guarantor (often a close friend or family member) agrees to repay the loan if the borrower can’t. Since this reduces risk to the lender, guarantor loans can make it possible for those with poor or limited credit to qualify for an unsecured personal loan.
However, guarantor loans come with risks and costs — for both the borrower and the guarantor. Here are some things to consider before you apply for a guarantor loan.
What Is a Loan With a Guarantor
A guarantor loan is typically an unsecured personal loan that requires the primary borrower to have a financial backer, or guarantor. A guarantor may be required because the borrower has not yet established credit or has had credit issues in the past (such as a history of late or missed debt payments). It’s still considered the borrower’s loan, but the guarantor is legally obligated to cover payments and any other fees if the borrower defaults on the agreement.
This guarantee reduces the lender’s risk and enables them to advance the money at a reasonable annual percentage rate (APR). However, APRs for guarantor loans are generally higher than APRs for regular personal loans.
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How Do Guarantor Loans Work?
Guarantor loans work in the same way as other types of personal loans — you borrow a lump sum of money from a lender, which you are able to use for virtually any purpose. You then pay it back (plus interest) in monthly installments over a set period of time, which may be anywhere from one and seven years.
The only difference is that a third party (your guarantor) is part of the loan agreement. The guarantor is legally bound to make payments on the loan in the event that you default. A loan default is generally defined as missing payments for several months in a row but the exact meaning will depend on the lender.
While the guarantor bears responsibility for repaying the debt, this individual doesn’t have any legal right to the loaned money or anything purchased with the loan proceeds.
Are You Guaranteed to Get a Loan With a Guarantor?
Although it can certainly help your case, there’s no guarantee that you’ll qualify to take out a loan with a guarantor. Approval depends on the financial profiles of you and your guarantor and the eligibility requirements of the lender.
Who Can Be a Guarantor for Loans?
A guarantor doesn’t need to be anyone specific — it could be a parent, sibling, friend, or even a colleague. You generally want to choose someone you trust and feel comfortable openly discussing your finances with. That’s most likely going to be a family member or a close friend.
Guarantors also need to have a good credit history and typically be at least age 18 (though some lenders require a higher minimum age). Some lenders also require the guarantor to be a homeowner. As part of the application process, guarantors will need to undergo a credit check and provide proof of identification and income, as well as bank details and statements.
What Should I Look for in a Guarantor Loan?
Like any other loan, it’s generally a good idea to look for a guarantor loan with a competitive APR and low or no fees. You’ll also want to carefully consider the monthly payments and be sure you can comfortably afford to make them. While this is crucial with any loan, it’s particularly important with a guarantor loan, since your guarantor will be on the hook for repayment if you fall behind. This could impact your credit as well as put a significant strain on your relationship with your guarantor.
How Much Can I Borrow for a Guarantor Loan?
Many lenders offer personal loan amounts ranging anywhere from $500 to $50,000 (and sometimes up to $100,000 for borrowers with excellent credit). Loan amounts for guarantor loans will depend on which lender you choose as well as your financial situation and your guarantor’s credentials (such as their credit score and income).
Guarantor Loan Requirements
Guarantor loans have eligibility requirements such as minimum credit scores and income thresholds that the guarantor will have to meet. Here’s a closer look.
Credit Score
While the borrower’s credit score might be poor or fair, the guarantor’s credit score should be considerably higher in order to secure the loan.
Proof of Residency
A guarantor will need to provide proof of residency. This can be done by showing documents such as a utility bill, a mortgage or rental agreement, or bank statements.
Income
The guarantor will need to verify a consistent income that’s sufficient to make payments on the loan if the primary borrower cannot. They will need to be able to show proof of income through bank account statements, pay stubs, invoices, and/or tax returns.
Age Requirements
The guarantor must be at least 18 years old, though some lenders have an age requirement of 21 or 22. They will need to show proof of age (and identity) with a government-issued photo ID.
Recommended: How to Apply for a Personal Loan
Types of Guarantors
Guarantors aren’t just for personal loans, and they don’t always take on the full financial responsibility of the agreement they’re entering into. Here’s a look at some different types of guarantors.
Guarantors as Certifiers
A guarantor may act as a certifier for someone looking to land a job or get a passport. These guarantors pledge that they know the applicant and they are who they say they are.
Limited vs Unlimited
Acting as a guarantor doesn’t always mean you’re responsible for the entire loan if the primary borrower fails to repay it. Limited guarantors are liable for only part of the loan or part of the loan’s timeline. Unlimited guarantors, however, are responsible for the full amount and full term of the loan.
Lease Guarantor
A guarantor may be required to cosign an apartment lease if the renter has limited credit and income history. In the event that the tenant is unable to pay the rent or prematurely breaks the lease agreement, the guarantor is responsible for paying any money owed to the landlord.
Guarantors vs Cosigners
Guarantors and cosigners play similar roles in a lending agreement — they pledge their financial responsibility for the debt to strengthen the primary borrower’s application. And, in both cases, these individuals may become responsible for repaying the debt.
However, there are some key differences between a guarantor and a cosigner. The main one is that a cosigner is responsible for repayment of the debt as soon as the agreement is final and will need to cover any missed payments. A guarantor, on the other hand, is only responsible for repayment of the debt if the primary borrower defaults on the loan.
There are also differences in terms of credit impacts. A cosigner will have the loan added to their credit report and any positive or negative payment information that the lender shares with the consumer credit bureaus can have a positive or negative impact on their credit. Becoming a guarantor, on the other hand, will typically not have an impact on an individual’s credit unless the primary borrower defaults on the loan. At that point, the loan will appear as part of the guarantor’s credit report.
Pros and Cons of Guarantor Loans
| Pros of Guarantor Loans | Cons of Guarantor Loans |
|---|---|
| Offers a lending option for people who cannot qualify for a loan on their own | Can be more expensive when compared to a standard personal loan |
| Helps borrowers avoid expensive and risky predatory loan products | Less choice of lenders compared with the wider personal loan market |
| Can help borrowers build their credit | Defaulting on the loan could strain your relationship with the guarantor |
A guarantor loan can allow you to borrow money even if you have limited or less-than-ideal credit. It can also help you avoid expensive and risky subprime loans that are marketed to borrowers with bad credit. In addition, the proceeds of a guarantor loan can be used for virtually any purpose, including emergency expenses (such as a car repair or medical bill) and lifestyle expenses (like a wedding or home improvement project).
As with all forms of credit, getting a guarantor loan can help you establish or build your credit, provided you manage the debt responsibly and keep up with your payments. Stronger credit can give you access to loans with better rates and terms in the future, without the need for a guarantor.
But these loans also come with some downsides. For one, guarantor loans can be expensive, often with higher APRs than other types of personal loans. Also, you’ll want to make sure you can keep up with the payments. Should you default, you’ll not only be hurting yourself but also the person who signed on as your guarantor.
Another downside is that there are fewer guarantor loans on the market than traditional personal loans. This can lead to less choice of lenders, making it harder to shop around and find a good deal.
💡 Quick Tip: Just as there are no free lunches, there are no guaranteed loans. So beware lenders who advertise them. If they are legitimate, they need to know your creditworthiness before offering you a loan.
What Happens if a Guarantor Cannot Pay?
A guarantor is legally obligated to repay the loan if the primary borrower defaults. If the borrower defaults and the loan is a secured loan, then the guarantor’s home could be at risk if the borrower defaults on the repayments and the guarantor is also unable to pay. This is not the case for unsecured guarantor loans, but the lender will still pursue the guarantor for the repayment of the debt, possibly through the courts.
Alternative Options to a Guarantor Loan
What if you don’t have a trusted person to ask to be your guarantor or you don’t want to ask anyone to take on this responsibility? Here are some alternatives to a guarantor loan that you could consider.
• Secured credit card: If you have some cash, you could pledge that as collateral on a secured credit card. Responsible use of this type of credit card could help you build your credit history so you can improve your chances of future loan approval. Interest rates on secured credit cards can be higher than regular credit cards, and there may be fees associated with their use.
• Flex loan: A line of credit that is similar to a credit card, a flex loan can also be used to build credit. Borrowers can use funds up to their credit limit, repay those funds, and borrow them again. Interest rates on flex loans tend to be high, and there may be fees assessed daily or monthly or each time the loan is used.
• Loan from a friend or family member: Perhaps the person you ask to be a guarantor doesn’t want to take on that responsibility, but they are willing to directly loan you the money. A loan from family or a friend can be an option to consider, but you’ll want to be sure to have a written agreement outlining the expectations and responsibilities of both parties. This will go a long way to minimizing miscommunication and hurt feelings. Keep in mind that this is not an option that will help you build your credit history.
The Takeaway
Getting approved for an unsecured personal loan is more likely if you have a solid credit history, an above-average credit score, and sufficient income to satisfy a lender’s qualification requirements. If you’re lacking one or more of these things, you might consider other types of loans, which might include a guarantor loan.
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FAQ
What are guarantor loans?
A guarantor loan is typically a type of personal loan that requires the primary borrower to have a financial backer, or guarantor. The guarantor agrees to pay the debt if the primary borrower defaults on the loan agreement.
How do I get a guarantor for a loan?
You might consider asking a trusted friend or family member to be a guarantor. This person should be someone who has solid credit and sufficient income to cover the loan payments should you default on the loan.
Are you guaranteed to get a loan with a guarantor?
No. Having a guarantor may strengthen a loan application, but it’s up to each individual lender to assess the qualifications of both parties.
Photo credit: iStock/fizkes
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