What a guarantor loan is
A guarantor loan is a regulated credit agreement in which a borrower receives money and a second person, called the guarantor, promises to repay the debt if the borrower does not. The guarantor is not merely a reference or a character witness; they take on a legal liability under the agreement. This structure can help a borrower whose credit history or income evidence would not meet a lender's usual criteria, because the lender has another person's promise to fall back on.
The loan remains the borrower's debt. The lender should still assess whether the borrower can afford the payments, and it must also consider the guarantor's ability to meet the payments if called upon. Guarantor loans are consumer credit products, so they are subject to the Consumer Credit Act 1974 and the FCA's consumer credit rules. You can check whether a firm is authorised on the FCA register.
Who can be a guarantor
Lenders set their own eligibility rules for guarantors, but common requirements include being an adult, having a regular income, and passing affordability and credit checks. A guarantor normally needs a good credit history and must not be in a debt management plan or insolvency process. Some lenders may require the guarantor to be a homeowner, although this is a commercial criterion rather than a legal requirement.
The guarantor should receive enough information to understand what they are signing. They must be told the amount of credit, the term, the interest rate and charges, and their potential liability. They should also be told if the borrower misses payments or if the lender demands payment from them. A person should never be pressured into acting as guarantor, and they should seek independent advice if they are unsure.
How the application and underwriting process works
Both the borrower and the guarantor are part of the lender's assessment. The lender will usually check credit files, affordability, and income and expenditure information for both people. The borrower may be asked to provide bank statements, proof of identity, and details of regular outgoings. The guarantor may need to show that they could cover the loan if the borrower stopped paying.
- The borrower applies and names a proposed guarantor.
- The lender performs credit and affordability checks on both people.
- The lender explains the key terms, including the total amount payable and the consequences of missed payments.
- Both parties sign the agreement if they still wish to proceed.
- The lender pays the borrower, and repayments begin according to the agreement.
Lenders must follow the FCA's consumer credit rules, including rules on affordability and fair treatment. You can read more about how lenders assess affordability and how to check your credit file before applying. If a lender cannot show that the credit is affordable for both parties, it should not proceed.
Costs, interest, and the total cost of credit
A guarantor loan is not automatically cheaper or more expensive than other credit. The cost depends on the lender's pricing, the amount borrowed, the term, and the borrower's and guarantor's circumstances. Before you sign, the lender must show you a representative APR and the total amount payable. The representative APR is a standardised way to compare the cost of credit, but it is not a promise that every applicant will receive that rate.
You should ask for the total cost of the loan, not just the monthly payment. Check whether there are arrangement fees, broker fees, or charges for missed payments. If you repay early, the lender may be required to reduce the interest under the Consumer Credit (Early Settlement) Regulations 2004. You can learn more about early repayment of a loan and representative APR. A lower monthly payment over a longer term can still mean you pay more overall.
Risks for the borrower and the guarantor
For the borrower, the main risk is that the loan becomes unaffordable. A missed payment can lead to default charges, damage to the credit file, and debt collection activity. Because the guarantor is involved, a missed payment can also harm a personal relationship. The borrower should have a realistic plan for maintaining payments if their income falls or their expenses rise.
For the guarantor, the risk is direct and legal. If the borrower does not pay, the lender can ask the guarantor to repay the outstanding balance, including interest and charges allowed by the agreement. If the guarantor cannot pay, the lender may take court action and the guarantor's credit file may be affected. A guarantor cannot usually remove themselves from the agreement simply because they change their mind. You can read about what happens if you miss a payment.
Both parties should consider what happens if the borrower's circumstances change, if the guarantor's circumstances change, or if the relationship between them breaks down. If a dispute arises, the lender should have a complaints process, and the Financial Ombudsman Service can review certain complaints. You can learn how to complain to the Financial Ombudsman.
Your legal rights and protections
The Consumer Credit Act 1974 gives borrowers and guarantors important rights. The lender must provide a copy of the credit agreement and regular statements, and it must follow rules on default notices and arrears. The Act also allows a court to consider whether a credit relationship is unfair under section 140A. You can read the unfair relationships provision on legislation.gov.uk.
The FCA's Consumer Credit sourcebook (CONC) sets out detailed rules on affordability, forbearance, and treating customers fairly. Firms must be authorised by the FCA and must comply with its rules. If a firm fails to do so, you can complain to the firm first and then to the Financial Ombudsman Service. The FCA also publishes consumer information on credit and borrowing.
Guarantors also have data protection rights. They can ask for a copy of their credit file from a credit reference agency, and they can dispute inaccurate information. Before signing, both parties should ask for all documents in writing and keep copies.
How to compare guarantor loans
Comparison should go beyond the advertised monthly payment. Look at the representative APR, the total amount payable, the term, the flexibility to overpay or settle early, and the lender's complaints record. Check that the lender appears on the FCA register. A legitimate lender will not ask you to pay a fee before you receive the loan or pressure you to sign immediately.
| Role | Main responsibility | Key question |
|---|---|---|
| Borrower | Makes repayments and repays the loan | Can I afford the repayments if my income changes? |
| Guarantor | Repays the debt if the borrower does not | Can I afford the full debt if called upon? |
| Lender | Assesses affordability and explains the terms | Is the firm authorised and are the terms clear? |
- Check the lender's FCA authorisation and read recent complaints information.
- Compare the total amount payable, not only the monthly payment.
- Ask about early repayment, overpayments, and any fees.
- Read the guarantee wording carefully and take independent advice if needed.
- Make sure both parties can afford the worst-case scenario, not just the initial payment.
You can use the site's guide to comparing loans and the loan comparison calculator to organise the figures. Do not rely on a single affordability check at the start; review your budget regularly.
Alternatives and getting debt advice
Guarantor loans are one option, but they are not suitable for everyone. If you have a limited credit history, a credit builder loan or a smaller unsecured loan may be worth exploring. If you are struggling with existing debts, consolidating or borrowing more is rarely a safe solution without advice. You can compare alternatives to payday loans and read about debt consolidation loans before deciding.
Free debt advice is available from charities and government-backed services. The government's debt advice page explains where to get help, and StepChange offers free debt advice. A debt adviser can explain options such as debt management plans, individual voluntary arrangements, and bankruptcy. They can also help you speak to creditors and prioritise essential bills.
If someone pressures you to act as a guarantor or to borrow money you cannot repay, stop and seek advice. A guarantor loan can help in the right circumstances, but it should be based on a clear understanding of the legal liability and a realistic repayment plan. It is never a quick fix for an unaffordable debt problem.