A guide to guarantor lending

Here, we look at the unsecured guarantor loan market in the UK, which consists of around 15 lenders in total.

A guarantor loan is a type of unsecured finance where the borrower has an extra person involved to co-sign the loan agreement, known as the ‘guarantor.’

The guarantor is typically someone with a close relationship to the borrower such as a parent, sibling, spouse or friend and when they sign the loan agreement, they agree to cover the cost of the loan if the main borrower cannot repay on time or at all.

This type of loan is very useful for someone with poor credit or no credit history who might have been turned down by mainstream finance such as banks and personal loans. However, using a guarantor with a good credit history and preferably a homeowner status, they are able to gain additional security and borrow up to £15,000 over a loan term of 1 to 7 years.

By giving the borrower a chance to prove their creditworthiness, every repayment they make is recorded and the information is sent to credit reference agencies such as Experian, Equifax and CallCredit (amongst others). By making repayments on time, it can improve the borrower’s credit score which will maximise their chances of securing finance in the future and at more affordable rates.

Related: Improving your small business credit rating

About the industry

The guarantor loans industry in the UK consists of around 15 lenders, with Bournemouth-based Amigo being one of the most widely known. Other popular lenders include UK Credit, 1Plus1 Loans, and Guarantor My Loan.

In 2013, the industry was said to be worth around £153 million, with 53,000 loans taken out, just a fraction of the £2 billion payday loans industry. With strong guarantors to back up the borrowers, the default rate is less than 5 per cent, whereas the payday industry sits at around 15 per cent.

The small concentration of lenders and commitment to responsible lending led to 530 complaints that year, compared to 29,000 reported for payday lending. (Source: Citizen’s Advice Bureau).

The uses for guarantor loans

Guarantor loans are typically used for lifestyle purposes such as weddings, new homes, home improvements, cars and new businesses. Since customers can borrow up to £15,000, it can certainly be a life-changing amount of money. Therefore, guarantor loan applicants are known to do more research before applying and carefully plan how they are going to spend the money they borrow.

The criteria for applying

The minimum age to borrow is 18 years old and applicants must be in part-time or full-time employment and living in the UK. The guarantor must be slightly older and some lenders insist that they are at least 25 years to reflect the extra responsibility involved with being someone’s guarantor.

To maximise the chances of being approved, the guarantor should have a good credit history and some lenders require homeowners only. This acts as extra security because it means the guarantor should be able to raise funds if they have a home and less likely to leave town if they have a property. Several lenders claim that if you have someone with a good credit history that trusts you, then we can trust you too.

The majority of guarantor lenders offer their services online with just a few select companies who are able to offer their services in stores across the UK.

The costs

The cost of guarantor loans ranges from 39.9 per cent to 49.9 per cent APR, which calculates to around 0.1 per cent per day. Sometimes having a strong guarantor can lower the amount you are charged and increase the amount you wish to borrow. Customers are able to repay their loans early at any time but there might be an early exit fee if you do so without a certain time period eg within the first year.

If you cannot repay your loan

A common misconception is that as soon as the borrower’s payment fails, the outstanding amounts are instantly collected from the guarantor’s bank account. This is not the case. If the main borrower misses repayment, the lender will always try contact them and talk them through the different repayment options such as pay plans and arrangements. It is only if the borrower does not respond to any correspondence or goes missing that the guarantor is contacted for repayment.

Information extracted from https://www.guarantorloancomparison.co.uk/.

See also: Personal guarantee and small business – everything you need to know

Ben Lobel

Ben Lobel

Ben Lobel was the editor of SmallBusiness.co.uk from 2010 to 2018. He specialises in writing for start-up and scale-up companies in the areas of finance, marketing and HR.

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