Guarantor loans can help a limited group of borrowers, but they often bring high costs and heavy risk for both borrower and guarantor.
What Are Guarantor Loans?
A guarantor loan is a personal loan where a second person promises to step in and make the repayments if the main borrower cannot. The guarantor is usually a friend or family member with a stronger credit record. Lenders assess both people, and once the agreement is signed, the guarantor carries legal responsibility for the debt as well as the borrower.
These loans target people who have poor credit history, no credit history, or past problems such as defaults or county court judgments. Mainstream lenders may reject these borrowers, so guarantor lenders step in and price the risk with higher interest rates and strict terms. A guarantor loan can sometimes open a door, but it does so by putting two people on the hook instead of one.
| Feature | Borrower Perspective | Guarantor Perspective |
|---|---|---|
| Who It Targets | People with poor or thin credit files trying to access cash | Person with stronger income and credit history |
| Legal Duty | Must pay the loan as agreed or risk default | Must pay in full if the borrower misses payments |
| Interest Rates | Often far higher than mainstream personal loans | Does not pay interest directly but carries full liability |
| Credit Checks | Credit record checked, even if it is already damaged | Full checks to confirm income, debts, and repayment history |
| Impact Of Missed Payments | Late marks and defaults on the borrower’s report | Late marks and defaults can also hit the guarantor’s report |
| Relationship Impact | Stress and tension if repayments fall behind | Pressure to chase the borrower or absorb the debt |
| Exit Options | Hard to refinance while credit remains weak | Can ask to be released only if lender agrees or loan is cleared |
| Regulation | Falls under consumer credit rules and lender checks | Protected by rules on notices and fair treatment |
In many countries, guarantor lending sits under standard consumer credit law. In the UK, for instance, rules from the Financial Conduct Authority set out how lenders must treat guarantors and what information they must give before chasing payments. Guidance on guarantor loans from the Financial Conduct Authority explains when a lender must send default notices and how they should word payment requests.
Consumer guides such as MoneyHelper’s article on guarantor loans also underline that both parties need a clear view of the risks before signing. They stress that the guarantor should only agree if they could comfortably manage the full payment themselves from their own income.
When A Guarantor Loan Can Seem Like A Good Idea
People often first ask, “are guarantor loans a good idea?” when they feel stuck. A lender may have turned them down, they may need to move home, repair a car, or deal with overdue bills, and they cannot see another way to borrow. In that moment, a guarantor loan can look like a lifeline, especially if a parent or close friend offers to help.
There are cases where this type of loan has worked reasonably well. The classic example is a young adult with stable income but little or no credit history. The guarantor has spare income, trusts the borrower, and fully understands the risk. The loan amount is modest, the term is short, and both people have thought through what would happen if the borrower lost their job or had a health problem.
Another scenario is where the borrower has had past money trouble but now has a consistent wage and a tight budget plan. They need a car to get to work or to keep a trade going. Without that car, they may lose income. A small guarantor loan, repaid on time and cleared early if possible, can give a second chance and help rebuild a credit record.
In these narrow circumstances, the structure can work. The key is that the loan remains affordable on the borrower’s own income, and the guarantor treats their role as a genuine last line of defence, not a casual favour.
Are Guarantor Loans A Good Idea? Pros And Cons
So, are guarantor loans a good idea? The honest answer is that they can work in limited cases, but they carry a long list of drawbacks that many people underestimate. It helps to set out the main positives and negatives side by side, then weigh them against your own situation and the potential strain on the relationship between borrower and guarantor.
Pros Of Guarantor Loans
- Access to credit when others say no: People with poor credit or no credit can sometimes borrow only through this route.
- Fixed payments: Many products use fixed monthly instalments, which makes budgeting easier than with an overdraft.
- Chance to rebuild credit: If the borrower makes every payment on time, both the borrower and sometimes the guarantor can show a positive record with that lender.
- Speed: Once a suitable guarantor is lined up and checks are passed, approval can be faster than rebuilding credit and applying again for standard loans.
Cons Of Guarantor Loans
- High cost: Interest rates are often much higher than those on mainstream personal loans or credit union products.
- Full liability for the guarantor: The guarantor can be chased for the full balance, plus interest and charges, if payments are missed.
- Impact on both credit files: Defaults and late payments can damage the credit records of both parties, not only the borrower.
- Hard to step back: Once the loan is active, it is usually tough for the guarantor to withdraw from the agreement.
- Relationship strain: If money trouble arises, the emotional weight on friends or family can be heavy and long lasting.
When you stack these points together, you can see why many consumer groups treat guarantor lending as a last resort rather than a standard choice. The product only makes sense when both parties have steady finances, the need is strong, and cheaper or safer options are either not available or clearly unsuitable.
Major Risks For Borrowers And Guarantors
Risk sits at the centre of the whole question around guarantor lending. Both people share the legal duty, but the guarantor often has more to lose. They may be a homeowner with a clean credit record, a long work history, and other debts that rely on that record staying clean. Once they sign, the lender can chase them for repayment if the borrower falls behind, even if the lender has not yet taken strong action against the borrower.
Financial Risk
Financial risk sits in three places. First, the borrower may take on more debt than their budget can handle. High interest and long terms can mean a large total cost, even for a loan that feels modest at the start. Second, the guarantor may not have the spare cash they believe they have. A change in job, illness, or rising bills can narrow their margin and make it hard to step in if needed. Third, extra charges for missed payments, letters, and collections visits can swell the balance in a short time.
Debt advice charities such as StepChange report that guarantor loans can turn a problem for one person into a problem for two. When a lender calls in the guarantee, the guarantor can find themselves choosing between their own bills and a loan they never spent. In some cases this has led to formal complaints, legal action, and long disputes that damage both money and mental health.
Relationship And Emotional Strain
Money already places strain on many families and friendships. When you link a loan contract to that bond, feelings can shift quickly. A borrower who misses a payment may feel shame and avoid talking to the guarantor. The guarantor may feel angry, used, or misled. Even when everyone acted in good faith at the start, stress can grow fast once letters and calls from the lender begin.
These strains can last well beyond the loan term. If the guarantor ends up paying, they may resent the borrower long after the debt is cleared. Social events, family gatherings, and day-to-day contact can feel awkward. In some stories shared with advice services and the Financial Ombudsman, people say that a guarantor loan damaged their closest relationships more than any other money issue.
Alternatives To Guarantor Loans
Before you agree to this type of borrowing, it makes sense to line up other options and compare them. The right choice depends on income, existing debts, credit record, and how urgent the need for money really is. Sometimes, reshaping the problem can remove the need for a loan at all. In other cases, a different product can spread cost in a safer way.
| Alternative | When It May Fit | Main Watchpoints |
|---|---|---|
| Credit Union Loan | Small sums for local members on fair terms | Membership rules and slower sign-up than online lenders |
| Overdraft Or Bank Loan | Customer with steady income and cleanish credit | Risk of high fees if the overdraft sits near its limit |
| Bad-Credit Credit Card | Ongoing small purchases, repaid each month | Danger if only minimum payments are made for long periods |
| Payment Plan With Creditor | Existing bill or arrears that can be spread out | Needs honest contact and paperwork that matches the plan |
| Budget Changes | Non-urgent spending that can be delayed or cut | Some cuts may be hard on day-to-day life |
| Extra Hours Or Side Work | Short-term income boost to clear a smaller gap | Health and time limits, plus tax on extra income |
| Debt Advice Service | High overall debts and missed payments already piling up | Need to share full details so the adviser can give clear guidance |
In many regions, non-profit debt advice services, legal aid clinics, and community money centres can help map out these paths. They can talk through whether you should borrow at all, or whether a breathing space scheme, debt relief order, or other formal plan might fit better than fresh credit.
Checklist Before You Sign A Guarantor Loan
If you still lean toward this kind of loan, a short checklist can stop rushed decisions. The goal is not to scare you, but to make sure both borrower and guarantor have the same facts and the same plan for tough days as well as easy ones.
Questions For The Borrower
- Can you cover the full payment from your own income, even if bills rise or overtime stops?
- Have you read the full agreement, including interest rate, term, and charges for missed payments?
- Do you know exactly how much the loan will cost in total over its full term?
- Are you willing to share bank statements and budget details with your guarantor so they can see the real picture?
- Could you reach the same goal by waiting, saving, or cutting costs for a while instead of borrowing?
Questions For The Guarantor
- Could you comfortably make the full payment every month from your own income if the borrower stopped paying?
- Would taking on that payment put your own rent, mortgage, or key bills at risk?
- Do you trust the borrower to tell you early if they run into money trouble, rather than hiding it?
- Are you prepared for the lender to contact you directly by phone, email, and letter if payments are missed?
- Would the friendship or family bond survive if you ended up paying most of the loan?
Both people should set a clear plan for what happens if the borrower misses even a single payment. That means deciding who contacts the lender, who pays that month, and how they avoid the same problem next time. A calm written plan, shared in advance, can avoid panic or blame when stress hits.
Bottom Line On Guarantor Loans
So where does this leave the question, are guarantor loans a good idea? For many people, the answer leans toward “no,” because high costs and shared liability create more problems than they solve. For a small minority, with a strong plan, steady income, and full trust on both sides, a carefully chosen guarantor loan can be a stepping stone toward a cleaner credit record.
The safest approach is to treat this form of borrowing as a last stop, not a first reflex. Check cheaper options, talk to free debt advice services, and read regulator guidance and lender terms from start to finish. If you still choose a guarantor loan, keep the amount small, the term short, and the communication between borrower and guarantor as open and honest as possible.