Can I get a loan with bad credit without needing a guarantor?

A guarantor loan can be a laudable way for a friend or family member to assist someone to enable them to borrow money. Ordinarily the person requiring a guarantor will have a bad credit rating or they'll have insufficient credit history. In the situations like these a few lenders allow people to borrow money, providing someone else will carry the burden if something goes wrong with repayments. There is a risk involved for the guarantor, so it's imperative for the guarantor before signing, fully understands what their responsibilities will be. It's not just a matter of vouching for borrowers character, crucially, they will have to repay the loan if the borrower fails to make repayments.

Guarantor loans are not the only option for people who have insufficient credit scores as some specialist lenders do offer alternative loans with no guarantor required. It pays to scour the market and ascertain which is the best deal for you.

The benefits

If used sensibly guarantor loans can be way for parents to encourage their adult children, who might otherwise be turned down for loan, to take responsibility of their finances and be able to borrow money, rather than simply relying on the Bank of Mum and Dad.

Taking this fictitious example, 21 year old Tracy Wilson had been turned down for a loan from her bank as she waited to take up a trainee position with an engineering firm. She needed to get access to some cash to pay for bills which would enable her to make the move from her family home in Wolverhampton to Manchester where she would start her job.  Because she was in her early twenties, didn’t have much in the way of savings and hadn’t taken out any credit agreements previously, her credit score of 665 was pretty low.

She needed to borrow around £1,200 before her first pay packet to cover costs involved with moving and the initial costs of renting a studio flat. She was aware of guarantor loans and spoke to her father about it. Her father was aware of the responsibility he would be taking on and decided he was happy to act as guarantor in order to help his daughter make the move. He knew his daughter was starting a new job and would have a regular income and  was very confident she would pay the loan back. 12 months later Tracy paid the loan back and as a consequence her credit rating enjoyed a boost.

In this example, guarantor loans proved to be effective in terms of enabling Tracy to take up her new position and in repaying the loan gave her credit score a welcome lift. Dad did not need to foot the bill and all ended well.

The pitfalls

Nevertheless, guarantor loans remain controversial, mainly because it is claimed by organisations such as the Citizens Advice Bureau, that those who put themselves forward as a guarantor  often don’t fully understand the implications. The problems arise when the borrower fails to make the repayments and the lender goes after the guarantor to recover the outstanding balance.

In July 2015 Citizens Advice Bureau released a report which suggested some guarantors they encountered were under the impression they were doing no more than providing a character witness for their borrower. The report claimed a number of guarantors were entirely unaware of their responsibilities and also warned that guarantors were often liable for the debt if a borrower dies.

The analysis of the market found loan amounts were typically in the range from £1,000 to £7,500 with repayment terms of between 12 and 60 months with an average interest rate of 46% APR. In 2013 50,000 such products were taken out and the guarantor market is estimated to worth around  £154 million.

Gillian Guy of Citizens Advice remarked "Guarantor loans carry huge risks," warning "our evidence shows people are getting involved without being aware of the dangers." The charity is demanding lenders are forced to provide guarantors and borrowers with a letter of agreement and include a cooling off period. They also argue of the need for a liability warning on any promotional advertising.