Do you need a guarantor loan?

How do you know if you need a guarantor loan? And more importantly, what does it entail?

Guarantor loans are typically used for lifestyle purposes such as weddings, new homes, home improvements, cars and new businesses. According to, customers can borrow up to £15,000, which 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 a few select companies such as Trust Two, who are able to offer their services in stores across the UK.

The costs

The cost of guarantor loans ranges from 39.9% to 49.9% APR, which calculates to around 0.1% 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 (e.g.: 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.

Using guarantor loans to fund your business or start-up

In 2016, the average amount needed to start a small business in the UK was £27,520, explains a report from Moneywise. The study showed that the most expensive areas to start a business were around Manchester (£44,733) and the least expensive was Newcastle (£17,008).

The survey was based on interviews with 850 small and medium-sized businesses and discovered that 42% of business owners used their own savings to kick-start their business and 24% received seed investment from family and friends. A third of those interviewed spoke of the difficulty of accessing mainstream finance and that banks were not ‘business-friendly’.

For this reason, it is no surprise that more entrepreneurs and business owners are looking for alternative finance to raise money for their business and this has seen the rise of crowdfunding websites and campaigns. There is also the popular rise in guarantor lending.

What is a guarantor loan and how does it work?

This is a type of unsecured loan which involves the main borrower (business owner) and an extra person they know to be part of the application and co-sign the loan agreement (the guarantor). This additional person is usually a close family member such as a spouse, parent or sibling and they agree to ‘guarantee’ any losses – so if the individual is unable to keep up with loan repayments, the guarantor can step in and pay on their behalf.

This type of finance is especially appealing to those with poor credit histories or young people with no credit history at all. Provided they have a guarantor with a good credit score and ideally have a homeowner status, they can get the finance they need to start their business venture.

Furthermore, if the borrower repays their loan on time each month, the information is sent to the credit reference agencies (Experian, Equifax and CallCredit) and over time this will cause the individual’s credit score to improve. So from the point of the guarantor, they can help the person they know get the initial funding and also rebuild their credit for future borrowing purposes.

Terms of the loan

Customers are able to borrow up to £15,000 which is repaid in equal monthly instalments over 1 to 7 years. Some lenders only offer a maximum of £7,500 and for a maximum of 5 years, so it is important to check with the lender beforehand.

But having a loan term that lasts several years, it gives the business owner some real flexibility to repay their loan. Plus, if they find that they are in a stronger financial position and their business is booming, they are able to repay early and making a huge saving on the interest they owe.

The average cost of a guarantor loan ranges from 39.9% to 49.9% representative APR depending on the lender. The rate advertised is ‘representative’ meaning that it is what will be given to at least 51% of successful applicants and works out to around 0.1% per day.

Where does the funding go for a new business?

Start-up costs: This includes the most basic things you need to get your business trading such as an office, van, computers, desks and any specialist equipment you need to provide your service such as tools.

Staff costs: Whether you have staff members part-time or full-time, having an extra pair of hands to start your business can be the difference between getting it off the ground.

Emergency costs: For any potential emergencies such as broken equipment or computers, it can be helpful to have a pot of money aside to cover any unexpected costs.

Legal fees and insurance: In order to operate legally in your industry, you may require some legal framework, regulatory authorisation and also some basic insurance to carry out your business activity.

Accounts receivable and payable: For many small businesses, there is a time lag in between money coming in and money going out – and sometimes you need the initial finance to cover your shortage in cash flow. Common for restaurants, caterers and contractors, having some money in between invoices can be very useful.

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