It may be worth considering a homeowner guarantor loan if you’re finding it difficult to obtain a personal loan because of your credit history. A guarantor is a friend or relative willing and financially able to back you and promises to repay the loan if you cannot.
With this type of loan, it doesn’t matter whether you (the borrower) are a homeowner, but it does require your guarantor to own their own home or to have a mortgage.
These types of loans usually charge a higher interest rate than traditional personal loans because of the perceived increased risk to the lender and the complications of adding a guarantor.
What is a guarantor loan?
Someone with a poor credit rating often struggles to obtain traditional personal loans. A guarantor loan is a personal loan guaranteed by a friend or relative – known as a guarantor – who usually has a better credit rating and promises to honour any debt if you, the borrower, default on your payments.
If the borrower can’t pay the loan, the guarantor takes over the repayments until the loan is paid off.
What is a homeowner guarantor loan?
With a homeowner guarantor loan, a borrower with poor or limited credit can obtain a loan by applying with a friend or relative who owns property and promises to step in if the borrower cannot repay the loan.
A homeowner guarantor loan requires the guarantor to own their home outright or have a mortgage. Ideally, they shouldn’t be a first-time buyer with only a short period on their mortgage. The loan is not usually “secured” on the property, but the lender generally considers the guarantor, as a homeowner, a safer prospect.
The interest rate charged depends on a range of factors, such as the loan amount, the duration and the borrower’s and guarantor’s financial circumstances (including the amount of equity in the property). It is likely to be higher than a mainstream personal loan but lower than a guarantor loan where the guarantor is not a homeowner.
Late repayments can cause you serious money problems. See our debt help guides.
Why take out a homeowner guarantor loan?
If you’re planning a big expense or looking to consolidate an existing debt, you may want to take out a personal loan. However, if your credit score prevents you from accessing most traditional personal loans, then a homeowner guarantor loan could be an option.
Asking a friend, family member or work colleague to be a guarantor is a big commitment, and it could impact their credit history or financial situation if you default on your repayments.
What should I look for in a homeowner guarantor loan?
When it comes to comparing homeowner guarantor loans, there are some key features to look for. Ask yourself these questions before deciding on a loan.
Do we qualify for this loan? Don’t waste time applying for a loan if you and your guarantor don’t meet the requirements.
Can I borrow the amount I need? Will you be able to borrow the amount you need, and will you be able to pay it back in a reasonable amount of time? If not, you might want to look elsewhere.
Does it have a competitive interest rate? Most guarantor loans charge a fixed interest rate, meaning your monthly repayments stay the same throughout the loan. Remember that the advertised rate is not necessarily the rate that the lender will offer you. Lenders look at factors such as the credit score and income for both you and your guarantor, as well as your (the borrower’s) expenditure, when deciding what rate to offer you.
Can I make overpayments or repay the loan early? Most lenders will not penalise you for paying back some or all of the loan early. However, that does not necessarily mean that doing so will save you money in interest. In many cases, you need to pay 1 or even 2 months of interest to settle your loan early.
How long will I have to pay it back? Aim for a loan term that gives you monthly repayments you can afford without being too long. Otherwise, you could wind up paying a lot in interest in the long run.
Are there any fees? Most lenders don’t charge fees on guarantor loans, but it’s always good to check.
Applying for a homeowner guarantor loan
To secure a homeowner guarantor loan, there are a number of criteria you need to meet. If you are a homeowner yourself, have you checked whether a guarantor loan is really your best option? Have you considered remortgaging instead?
Criteria for the borrower
Aged between 18 and 75.
Either working full-time, part-time or for an agency; self-employed or a pensioner.
UK resident.
Holds a UK bank account.
Able to afford the loan.
Criteria for the guarantor
Aged between 21 and 75 (although some lenders have a minimum age of 18).
Owns a residential property outright or has a mortgage on one.
Can afford the payments if the borrower can’t.
Not the partner or spouse of the borrower.
Comfortable to act as guarantor and understands the commitment they are undertaking.
Thinking about becoming a guarantor?
If a friend, relative or work colleague has asked you to be a guarantor, there are some things you must consider before applying.
Do you trust them to make all the payments on time each month?
Are you sure the borrower can afford it?
Are you comfortable taking over the payments if something goes wrong?
The application process
Do your research and compare loans before applying, and make sure both you and your guarantor meet the eligibility criteria. The application process usually goes as follows:
Borrower fills in details and signs agreement.
Guarantor fills in details.
Lender checks both the guarantor’s and the applicant’s credit score and ability to pay off the loan.
Guarantor signs agreement.
Lender may contact the borrower, guarantor or both over the phone to discuss affordability.
Lender officially offers the loan once the lender is satisfied with both parties.
Borrower accepts the loan offer.
Lender issues the funds to the guarantor, who can then transfer the amount to the borrower.
Many lenders aim to complete and approve an application within 48 hours.
More likely to be accepted than a non-homeowner/tenant.
Generally no fees.
Unsecured so the guarantor’s home is not at risk.
Cons
Need to find a guarantor with good credit and a home.
Rates still higher than traditional personal loans.
Rates/approval likely to depend on amount of equity in the property.
The bottom line
A homeowner guarantor loan can be a suitable option for borrowers with poor or average credit scores who might not qualify for a personal loan from traditional lenders, albeit they do often come with higher interest rates. This loan relies on a guarantor who will be responsible for any debt if the borrower defaults on repayments.
The guarantor and borrower must both fulfil certain eligibility criteria. Specifically, the guarantor must be a homeowner or have a mortgage.
Frequently asked questions
If the borrower were to enter into an individual voluntary arrangement (IVA), go bankrupt, simply stop paying or pass away, then the guarantor would become solely responsible for each monthly repayment until the loan is cleared.
A homeowner guarantor loan is not a secured loan, so it’s not tied to your home as collateral. If the borrower defaults, the guarantor will need to continue paying off the loan.
As with most unsecured loans, most lenders could request a county court judgement (CCJ) or a “charging order” on the homeowner’s property if both the borrower and guarantor default on the loan. The charging order means the lender could obtain their outstanding debt from the sale or remortgaging of the guarantor’s home. However, lenders rarely resort to this action and usually work with the borrower and guarantor to devise an alternative method of paying off the loan.
Yes, the lender runs a credit check on both of you before deciding on your application.
This is to avoid fraud and to guarantee the guarantor named in the paperwork really is the guarantor.
If you act as a guarantor, this will be listed as a financial association on your credit report. The guarantor loan will not affect your score unless the borrower defaults and you become responsible for making the repayments. However, lenders look at your financial associations when considering you for a line of credit.
No. The guarantor remains as guarantor until the loan is paid off in full.
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Chris Lilly is Head of publishing at finder.com. He's a specialist in personal finance, from day-to-day banking to investing to borrowing, and is passionate about helping UK consumers make informed decisions about their money. In his spare time Chris likes forcing his kids to exercise more. See full bio
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A guarantor loan allows people with no or a very low credit score to borrow if they have a guarantor who agrees to cover any unpaid monthly repayments. We have compiled statistics on how people are handling their guarantor loans.
Looking for a non-homeowner or tenant guarantor loan? Learn all you need to know about how they work, lending criteria and how to apply online.
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