Getting a guarantor loan when you have bad credit

If you’ve been declined a loan because of bad credit – or no credit history – a guarantor loan could be a lending option that’s open to you. This is when someone, usually a friend or family member -with a good credit history ‘guarantees’ your loan, which means they’ll have to pay it back if you can’t. 

It’s important to be very careful with these loans, as typically they are much more expensive than standard lending, can cause rifts in relationships if things go wrong, and in recent years the biggest guarantor lenders have failed to meet proper checks.

When you borrow money from a traditional lender, usually a bank or a credit union, you pay back what you borrow with interest added on top. A guarantor loan works in the same way except you also nominate an extra person who can step in and make your payments if you can’t afford to.

The purpose of a guarantor is to show the lender (the company giving you the loan) that there is someone with good credit who can pay back the loan if you’re not able to. This person ‘guarantees’ that the lender will get their money back, even if you have bad credit or no credit history. 

Typically, a guarantor would be somebody who knows you very well, who has a stable income – and can therefore afford to potentially make the loan repayments on your behalf. It’s also important that it is someone who is able to clearly understand what it means to be a guarantor.  A lender will ask for their details when you apply for the loan.  

Being a guarantor is serious. They are legally responsible for your repayments if you run into trouble so, if somebody says that they don’t want to be your guarantor, you cannot pressure or force them.  

You can find out more about what it means to be a guarantor in our guide Guarantor Loans explained.

The main benefit of getting a guarantor loan is that it is a way to borrow money if you don’t have other options. This could be because you don’t have a long enough credit history – for example, if you’re a young person living independently for the first time or someone who’s just moved to the UK.

No credit history means a lender can’t judge whether you’re likely to pay the loan back on time. See our guide How to improve your credit score for your next steps.

Typically, guarantor loans are some of the priciest ways to borrow money. Their rates of interest are sky-high compared with standard high street lenders. For a typical guarantor loan you could end up paying back up to £175 for every £100 you borrow.  

Bear in mind that while lenders should check whether you can afford to pay back the money you are asking to borrow, some lenders including the UK’s biggest guarantor lender – have been found to have not done so.  In fact, it was found to have mis-sold thousands of loans and ordered to pay compensation.

While your lender should carry out proper checks, it is always vital to ask yourself whether the loan is affordable for you. Could you afford all your essential household bills on top of your repayments? Because if you struggle to make your repayments, your guarantor is legally obligated to step and pay them for you.  

If you’re not sure whether borrowing is right for you, check our guide on Making sure you can afford to borrow.

If the person you are acting as a guarantor for has a poor credit score they might not be able to comfortably make their repayments. So, the main risk is that you could be forced to pay back money. Even with the best intentions, life has ups and downs and job and housing situations can change, so what was affordable for them in the past might not be affordable in the future. As a guarantor, you need to consider how you would handle being responsible for their debt.   

There is also an emotional aspect to it. For someone to ask you to be a guarantor, odds are you are close and care for each other. It’s really easy for things to go wrong, and for it to negatively impact your relationship.

It could. If the borrower makes all their repayments on time, your credit score will not be affected – however, if you have to step in to pay any of the borrower's repayments – or if the loan defaults, this will be visible on your credit report. You can easily check your credit score – find out how in our guide How to check your credit report.