Welcome to Little Loan's guide to the world of guarantor loans, one of the UK's fastest-growing forms of unsecured finance available for people with a bad credit score.
If you're new to guarantor loans, this factsheet has been written to cover the main questions people ask, which are;
You know when you're going for that dream job? You know you can do it. You know you have the skills, the experience, and the qualifications to really make a success out of it.
But the business you want to work at won't give you a start date until they've heard back from a referee who agrees to provide you with a reference proving that you’re great at what you do. Someone who knows you, the hours you put in, the way you look after customers, and how you always provide a top-quality service?
The guarantor in a guarantor loan is a bit like a job referee. It's like a personal recommendation from someone who knows you well enough to say to a lender, "I know this person's credit score isn't the best, but they are good for the money".
And that belief in you goes even further. The guarantor is so confident that you'll be able to make all of the monthly payments in full and on time that, if you miss any, they'll honour each failed payment on your behalf. After all, no-one would sign up to be a guarantor if they thought the person, they're guaranteeing for was going to leave them with a big debt.
This is a form of finance that's become very popular in the UK in the last few years. People whose circumstances meant that they hadn’t been eligible for borrowing in the past can now often get the money they need sent into their bank account with the help of a friend or a family member.
Guarantor loans are financial products specifically aimed at servicing borrowers who have a poor credit rating.
Remember how, in years gone by, a bank would only give a mortgage to a first-time buyer if someone acted as a guarantor for the mortgage? Finance companies use exactly the same principle with a guarantor loan customer that banks and building societies used to use in the past.
The fact that a guarantor recommends you is important. What gives finance companies the confidence they need to make you an offer is knowing that if you can't repay the loan, then the guarantor will be paying them on your behalf instead.
As long as you only keep making the minimum monthly repayment, it could take you years (in some cases, more than a decade) to completely settle all of the outstanding balances on your credit card, store card, and overdraft debt.
You can nominate almost anyone to be the guarantor in a loan agreement. Most people choose the option of having a friend or family member to be their guarantor.
However, someone with a poor credit history themselves is unlikely to be acceptable as your guarantor.
Loan guarantors generally:
Although there is likely to be a better chance of your guarantor being approved if they are a homeowner, it's not a pre-requisite to making a request for a loan. It all depends on the lender - for some, it's important that your nominated guarantor is a homeowner whereas, for others, it's not.
Are guarantor loans unsecured loans? Yes - a guarantor loan is an unsecured loan so you don't have to be a homeowner to apply for one.
If you keep up to date with all the monthly repayments during the term of your loan, there is a chance that your credit rating might improve as a result.
However, if you default on the loan or if you miss payments regularly, regardless of whether or not your guarantor covers your late payments, there could be a very adverse effect on your credit rating.
Guarantor loans may be a suitable idea to help you out of a tight spot financially only if you're sure that you can make all of the payments in full and on time without relying on your guarantor.
For your peace of mind, all of the lenders on Little Loan's panel are authorised and regulated by the Financial Conduct Authority.
Banks appear to have completely withdrawn from offering unsecured guarantor loans to customers.
When you take out your guarantor loan, you'll receive a schedule of repayments from the lender letting you know how much each repayment will be for and when the money will be collected from your bank account.
You can apply direct to a guarantor loan provider or you can apply through a broker like Little Loans (also authorised and regulated by the Financial Conduct Authority).
Every time you make a full application for a guarantor loan direct with a lender, a hard credit search will appear on your credit report.
This is important. One way many lenders decide whether they are going to approve your application or not is to look at how many times hard searches have been run on your credit file.
If there are too many hard searches in a short space of time, this often puts lenders off accepting your request for a loan because they may think that you're struggling financially.
When does a hard credit search happen? A hard credit search will take place:
Brokers like Little Loans work differently. We work with a panel of loan providers and, when we receive a request from a borrower for money, we only send your details to those lenders who are likeliest to say "yes" to you.
How do we know that? When a lender starts working with us, we ask them lots of questions about the types of loan they like to make and the types of borrowers they like to work with. With that information, we make sure that your application is only considered by relevant lenders.
With us, only one hard credit search will be run even if we approach multiple lenders on your behalf.
You can apply online through us at any time of the day or night. As we mention above, once we have all your details, we'll contact the loan providers on our panel of lenders who are more likely to appr ove your application.;
At this point, each lender we contact will run a soft credit check on you. We wait a few seconds to hear back from the finance companies we've contacted and, if we get a positive reply back, we'll send you over to that lender's website.
When you've completed the application form on your lender's website, you'll need to tell them who the name of your guarantor is as well how to get in touch with them.
Once your prospective finance provider has your guarantor's details, they'll attempt to contact them usually by email or text message. In the email or text message they receive, they'll be told that you've nominated them to be the guarantor for the loan that you want to take out.;
At this point, your loan guarantor nominee will either agree to go ahead or not. If they do, then they have to fill in an application form telling the lender about their own personal and financial circumstances.
This is when a hard credit search will be run on you. Some guarantor loan providers also run hard credit searches on your guarantor however others will only perform a soft credit search.
At that point, they'll:
If the lender is happy to proceed once they have all the information, they need from you and your guarantor, the lender will then explain to both of you the responsibilities you share for the debt and for making the repayments in full and on time.
You and your guarantor are effectively joint borrowers in the lender's eyes - the debt belongs to both of you even though your guarantor will not receive a penny into their bank account when the loan has been approved and agreed by both you and your guarantor.;
The lender will not approve the loan unless they are convinced that both of you understand that the guarantor will be responsible for making payment on your behalf if you're not able to.;
The lender will finalise their offer to you. They'll show you:
If you decide at this point to become their newest customer and you choose to accept the loan after you've read the terms and conditions, a new lending agreement will exist between you and the finance company.;
Payment of the loan into the bank account you've registered with them will normally be quick - that will be the same account that your lender will collect your repayments from.
Please note that failure to meet repayments on your guarantor loan or defaulting on your loan is likely to have a significantly adverse impact on your credit score. In addition, your guarantor will be contractually obliged to make the repayments that you fail to make. If your guarantor is unable to make missed or overdue repayments on your behalf, there may also be a significantly adverse impact on their credit score.
You and your guarantor should read and understand the terms and conditions of any offer made to ensure that you understand the risks and responsibilities of entering into a loan agreement.;
Apply for a guarantor loan through Little Loans for between £100 and £5,000 with repayment schedules of between three months and three years. Please remember that, if you take out a guarantor loan over a longer term, your monthly repayments will likely be more affordable, but you will pay more in interest over the course of the loan.
Representative Example: Amount of credit: £1200 for 18 months at £90.46 per month. Total amount repayable of £1628.28. Interest: £428.28. Interest rate: 49.9% pa (variable). 49.9% APR Representative. We’re a fully regulated and authorised credit broker and not a lender