A Guide to Guarantor Lending

In securing loans for your business, more often than not, you need to proof that you and your business are financially fit to shoulder the repayments.  Unfortunately, if you have a bad credit score, it’s rather challenging to show creditors that you won’t give them repayment problems in the future. So, what’s the solution?

There are several creative lending options to consider, but in this article, we would like to highlight one of them, guarantor lending.

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What is a guarantor loan?

A guarantor loan refers to borrowing up to £15,000 and requires the borrower to find an extra person to be their guarantor and be willing to repay their loan if they cannot meet repayments.

It is ideal for those with bad credit scores who need an opportunity to obtain finance and improve their credit score, hence they can use the better credit score of their guarantor and get the funds they need.

There are around 12 guarantor lenders in the UK with loan amounts ranging from £1,000 to £15,000 and repaid in equal monthly instalments over 12 to 84 months. Some of the most well-known lenders in the country include Amigo, Trust Two and Buddy and loans are typically funded within 48 hours of applying.

What is the criteria?

Borrowers must be a minimum of 18 years old to apply, in employment and living in the UK. Their guarantor must be slightly older with some lenders requiring the individual to 23 or 25 to reflect the increased responsibility with being someone’s guarantor.

The guarantor must have full knowledge of the loan agreement and be willing to co-sign a document. They must also be available to answer some basic questions over the phone regarding their loan and provide their bank account details where they will receive the funds first before passing them onto the borrower.

Some lenders will require the guarantor to be a homeowner as this gives them added security that they own a property and will be easier to contact in the future. Other lenders will accept tenant guarantors but will charge a higher rate to reflect the risk involved.

Who is the ideal guarantor?

The preferred guarantor is someone with a good credit history and a homeowner status. If someone has a strong record of repaying loans and credit cards in the past, you are able to leverage their rating and get the loan you need.

Guarantors are typically parents, siblings or spouses and someone who has a good understanding of your finances. You probably wouldn’t want to get an acquaintance or someone who isn’t close to you to be your guarantor as it is quite a personal thing.

Since guarantor loans can last up to 7 years, you want someone who you will still be speaking to in that time, if need be. After all, you never know what your financial position will be like and if they will need to be called upon. Hence a close family member is ideal and maybe a friend or colleague is less suitable.

Getting business loan

What are the costs?

The APR charged by UK lenders ranges from 39.9% to 49.9%, and because it is representative, it means that this is the rate given to at least 51% of successful customers.

Whilst this rates equals to around 0.1% per day, having a guarantor with a poorer credit rating or being a tenant increases the risk for the lender and can make the rate increase to 59.9% representative APR.

What should I consider before applying?

Answer these questions to make sure that a guarantor loan is what you actually need:

  • Do you need the loan? If you are involving your family or friend, you need to consider whether it would be smarter to borrow from them directly and reduce any interest charged.
  • You should consider how strong your relationship is with your guarantor. You do not want them to get mad if they need to step in and make a repayment. Money can ruin friendships so it is good to manage expectations beforehand.
  • Does the guarantor understand their responsibilities? The guarantor must probably have some disposable income if they are going to cover a missed repayment. They must also realise that they cannot exit the agreement until the loan is paid off.
  • Finally, think about how you are going to repay your loan. Whether it is through your income, a bonus at work or inheritance, you need to think about how you will make repayments to avoid falling into debt or using your guarantor.