When You Should and Should Not Use Guarantor Loans

Posted byDaniel Tannenbaum | Category Blog | Date 14 January 2016

Guarantor loans are supposed to be used for emergency purposes and not for frivolous spending or material gain.


The idea is that by applying online through one of our featured lenders, you can get the funds you need to pay for your emergency in one lump sum and then you can repay your loan over equal monthly instalments, finding yourself in a better financial position.

The lenders we feature on our comparison table have a commitment to ‘responsible lending’ so it is important that they lend to individuals for the right reasons and they may ask you to confirm this during the application process.

When you should use a guarantor product

The typical emergencies ideal for the loans we feature include:

  • Paying rent
  • Home repairs e.g broken boilers, toilets, flooding, flooring, roofs
  • Medical bills and pet visits
  • Car repairs
  • Funerals

Paying rent is a common reason for a guarantor loan. With 3.8 million private tenants in the UK and the average rent costing £164 per week or £656 per month, one cannot run the risk of being behind on their rent as this can lead to increased charges and possible eviction.

On a similar note, private tenants and homeowners typically take our emergency loans for home repairs such as broken boilers or toilets. One cannot handle flooding in their home and so the idea of getting money to fix it quickly is very appealing.

British Gas quotes £79 for fixing a broken boiler in under an hour but over £400 for callouts over 4 hours. If you have had an expensive month or do not have enough money in your account, the concept or borrowing upfront and repaying this the interest in low monthly instalments for up to 7 years can seem like a good idea.

Medical, dental and pet bills can be very expensive too and they can be genuine emergencies because you can never be sure when they are going to happen. Whether its a broken tooth (around £222.50 on the NHS), xrays or your beloved family pet has fallen sick, a short term loan acts as buffer to cover the short term emergency expense.

Car repairs are one of the most common emergencies that we have because without a working car, we may not be able to drive to work or take the kids to school, so it puts our life on hold. With garages in the UK charging as much as £75 per hour, the cost to fix your car can be enormous.

Funeral expenses are constantly increasing, with MoneyAdviceService calculating that the average funeral costs around £3,600 to include a funeral director, ceremony, flowers, coffin, headstone and more. Losing a loved one is never easy, especially with the financial burden, a guarantor loan can help you borrow the funds you need and repay over 5-7 years.

When not to use a guarantor product

One shouldn’t use high interest loans for non-emergencies. This is because the interest rate of 49.9% APR is more expensive than your average loan such as a credit card (16%) or personal loan (3%-7%) (Source: MoneySavingExpert.com)

Also, if you find that you cannot repay your loan, there may be one-off default fees of up to £30 or late fees added – so the cost of the loan can be even greater.  Not to mention that failing to repay on time may worsen your credit score and make it harder to access future credit elsewhere.

Examples of when you shouldn’t use a guarantor loan include:

  • Shopping
  • Christmas presents
  • Holidays
  • New cars
  • New home

One should not use our loans for shopping or Christmas presents because they are not genuine emergencies. For a new car, you can always look at leasing or purchasing 0% car finance from competitive dealers.

If you are looking for a deposit for a new home, your best option is to get a mortgage with a higher loan-to-value (so borrow 80% instead of 70%). You can receive very low  interest rates for a mortgage that are under 5% and can  give you up to 40 years to pay it off.

In addition, one should not use a guarantor loan to pay off or consolidate other forms of debt such as credit card, payday loan and personal loans. By using credit to pay off other credit can lead to a debt spiral and bankruptcy. Read here about debt management.

If you are experiencing repayment issues, please speak to the Citizens Advice Bureau, MoneyAdviceService or borrow money from your local credit union which offers low cost not-for-profit loans.

Things You Should Remember About Your Loan

You always have the option to repay early if you wish and you will save money by doing so, as you are only charged the daily interest that has been accrued. Some of the lenders we features will require you to pay at least two months repayment if you wish to repay early and some will even offer cash back and refund your entire payment from the last month!

Furthermore, guarantor loans are ideal for those with bad credit that have struggled to obtain finance elsewhere. By having a guarantor who you trust and has a good credit score and history of repayment, it will encourage the lender to trust you as well, and so this will increase the probability of your loan being approved.

For those with poor credit, it gives them the opportunity to get the loan they need and if they can make every repayment on time, the information will be sent to a credit reference agency such as Equifax and this will cause the individual’s credit rating to improve.