Guarantor loan or bad credit loan: how the two routes compare

If your credit history is poor, there are two broad routes to borrowing. A guarantor loan needs a second person, usually a friend or family member, who signs up to repay the loan if you do not. A bad credit loan, sometimes called a no-guarantor loan, leaves you solely responsible for keeping up the payments and repaying the amount borrowed¹.

The trade-off is straightforward. A guarantor loan is easier to be accepted for, because the lender is lending on the strength of the guarantor's ability to repay, but it is a form of high-cost credit and tends to be more expensive than a no-guarantor loan¹. A no-guarantor loan keeps the arrangement between you and the lender, but an application with a poor credit history and no guarantor is less likely to be accepted¹.

The Financial Ombudsman Service receives complaints about guarantor loans from both borrowers and guarantors, and in the first quarter of 2025/26 it upheld 52% of the guarantor loan complaints it decided³. That is the context for everything below: these are products with real risks on both sides of the agreement.

How a guarantor loan differs from a bad credit loan

A guarantor loan is a loan provided to borrowers only if another person guarantees to make the payments if the borrower does not³. The guarantor is usually a friend or family member². The creditor agrees to lend the money based on the guarantor being able to repay the loan in full, which is why the guarantor's finances matter more to the decision than the borrower's².

A no-guarantor loan is one where you are solely responsible for keeping up the payments and repaying the amount borrowed, without a guarantor¹. It can be unsecured, where you borrow a specific amount over a set period and make fixed monthly repayments, or secured¹. Another way to describe it is simply an unsecured loan that does not require another person with a better credit rating to guarantee repayments⁷.

The practical difference is who the lender is relying on. Guarantor loans are genuinely sold to borrowers in the UK with bad credit, and are usually marketed at people who have bad credit or were turned down by other lenders². A no-guarantor loan may still be approved with a history of bad credit if the lender is satisfied you can afford the repayments⁶. The main disadvantage of borrowing with a poor credit history and no guarantor is that the application is less likely to be accepted¹.

A bad credit rating makes borrowing more expensive and harder in general, which is the backdrop to both routes⁹. If you are weighing up the wider market, getting a loan with a poor credit history sets out what lenders look at, and near-prime and subprime lenders explains the tiers of the market.

Cost: guarantor loans are high-cost credit

Guarantor loans can be more expensive than some other types of credit because they often have higher interest rates⁵. They are a form of high-cost credit, so a low APR is unlikely to be available¹⁰. The cost of the debt can be high, the interest rates can be high, and the interest could mean you pay back more than you borrow².

Guarantor loans tend to be more expensive than no-guarantor loans¹. That is the price of the extra acceptance chance: the lender is taking on a borrower it would otherwise decline, and pricing for it.

On the no-guarantor side, there are no specific fees associated with bad credit loans, but extra charges may apply for arrangement or acceptance, late payment or early repayment, so the terms are worth reading closely¹. For a fuller picture of what lenders can charge and when, see loan fees and charges and how loan interest is calculated.

Who can be a guarantor: at least 21, good credit, UK resident

In general, a guarantor must have a good credit history, be at least 21 years old (or 18 in some cases), and live in the UK, in case the lender needs to take legal action⁵. Lenders also usually want the guarantor to have a separate bank account from the borrower⁵.

Some lenders add their own conditions. The lender might ask for proof that the guarantor is working, proof of income, or for the guarantor to be a homeowner⁵. Creditors sometimes require the guarantor to be a homeowner to demonstrate they have assets that could potentially cover the debt⁸. Guarantors with a bad credit history are not likely to be accepted¹¹.

The guarantor must prove they can afford the repayments, based on their income, savings and any assets². This is not just a lender preference: where a guarantor is to provide a guarantee, the firm must undertake a reasonable assessment of the potential for the guarantor's commitments to have a significant adverse impact on the guarantor's financial situation, based on sufficient information including from the guarantor, the borrower or a credit reference agency¹². That assessment does not need to be identical to the borrower's, but it must be sufficient in depth and scope given what might fall on the guarantor, and providing a guarantee does not remove or reduce the obligation to assess the borrower¹².

One common question is whether a partner or spouse can act. Usually not: to be a guarantor you generally must not be financially connected to the borrower, such as a spouse or partner⁸. If a partner or family member is pressuring someone to act as a guarantor for a loan, that is financial abuse⁵.

What the guarantor is agreeing to

A guarantor is a second person who signs a credit agreement to say they will repay the money if you do not¹³. The creditor agrees to lend the money based on the guarantor being able to repay the loan in full². It is like a joint debt in which the borrower and the guarantor are responsible for paying it back¹⁴.

The extent of that liability is the part people most often underestimate. Depending on the terms of the agreement, the guarantor may become liable to pay back everything that you owe, not just the payments you have missed². The guarantor is legally responsible for repaying the loan if the borrower does not pay, and failure to do so could result in legal proceedings that could affect their credit score¹⁴.

The guarantor has the same rights as the borrower under the credit agreement. For example, the guarantor should get the same information before and after signing an agreement¹³. Under the FCA's rules, a reference to a borrower, a customer or a hirer includes a reference to an individual other than the borrower who has provided a guarantee or an indemnity in relation to a regulated credit agreement¹⁵.

Guarantor loans can be secured or unsecured. In a secured guarantor loan, the borrowing is linked to an asset the guarantor owns, such as their house¹⁶. In some cases the guarantor may secure the loan against their property². A credit union product, for example, asks the guarantor to agree that their savings can be transferred to make loan repayments if the borrower defaults¹⁷.

Why the money sometimes goes to the guarantor first

Some lenders pay the loan money into the guarantor's bank account, who then forwards it to the borrower⁸. In other cases the loan money may be transferred to the guarantor first and then passed on². It is one of the ways the lender keeps the guarantor inside the arrangement from the outset, and it is a good reason for the guarantor to understand exactly what they are signing before any money moves.

The lender must do an affordability check for both the main borrower and the guarantor¹⁸. The guarantor must prove they can afford the repayments based on their income, savings and any assets².

Effect on both people's credit scores

Being a guarantor will not affect your credit rating as long as the borrower pays back the debt on time⁵. A credit check is done on the guarantor when they agree, and this is added to their credit file¹⁰. Before someone becomes a guarantor, the lender will normally carry out a soft credit search, which is not visible to other companies and will not affect the credit score⁵.

The picture changes if things go wrong. If the borrower defaults and the guarantor is pursued, the default gets recorded on both credit files². Credit reference agencies do not normally record details of a guarantor on a credit report if the original borrower keeps their repayments up to date, but they are recorded if the borrower defaults and the guarantor is pursued¹⁹.

There is a second, slower effect. Being a guarantor can have a negative impact on future mortgage applications when lenders calculate accumulated debts for affordability, and it may stop the guarantor getting another mortgage¹¹. The debt may also harm the guarantor's chances of getting credit in the future²¹. Acting as guarantor for a partner's debt does not usually create a financial association on the guarantor's credit report, but the lender can pursue the guarantor if the partner fails to pay, and the guarantor's credit report could be affected²².

On the borrower's side, all types of credit have the potential to improve a credit score if used as stated in the terms and conditions and payments are made as agreed²³. Guarantor loans are less risky for the borrower than the guarantor, but can negatively affect both people's credit score if not paid back on time⁵.

If repayments become a problem: arrangements, defaults and enforcement

If the borrower fails to make payments, the guarantor is legally liable to pay back the loan for them⁵. If you miss payments, your guarantor will need to pay instead²⁴.

What happens next depends on the type of arrangement. If you enter into an arrangement with creditors, formal or informal, the loan company will default your loan and contact the guarantor to maintain the original repayments⁸. If the arrangement is informal, such as a debt management plan, you remain liable for the debt and the loan company can continue to take action against you if the guarantor does not maintain the original repayments⁸. If the arrangement is formal, your liability for the debt is included in it, but the guarantor is still fully liable and expected to maintain the original repayments⁸.

The consequences of default can escalate. The debt can be passed to a collection agency, and court action might be taken². If you refuse to pay, the lender may start enforcement action and your credit rating will be affected¹⁰.

Guarantor loan debts can be included in most debt solutions, like debt management plans and bankruptcy¹⁰. In bankruptcy in England, a guarantor loan is included in the bankruptcy but the guarantor will still have to pay the debt²⁵. An individual voluntary arrangement does not affect secured debts such as a mortgage without the consent of the secured creditor²⁶. If an IVA fails, debts are reinstated less any payments received by the creditors, interest may be added back on, and the insolvency practitioner may be required by creditors to petition for bankruptcy²⁷.

If repayments are becoming unmanageable, free and impartial help is available. StepChange and National Debtline both advise on guarantor loan debts, and what to do if you can't repay a loan sets out the options in order. There is also a page on what a guarantor pays when the borrower misses payments.

Complaining about an unaffordable loan or an unfair guarantee

When agreeing to a loan, lenders need to make sure the borrower can afford the repayments without too much trouble, and they must show what checks they did if the loan is complained about as unaffordable³. Lenders should always check that a borrower will be able to repay a loan on time without borrowing more or falling behind on bills¹⁰.

You have the right to complain to your lender if they gave you credit irresponsibly and you are now struggling financially as a result¹⁸. Consumers who feel they have either been given unaffordable credit, or that the lender acted irresponsibly in providing the product, may be able to complain to the Financial Ombudsman Service²⁸. The ombudsman sees complaints about unaffordable lending across a range of credit products, from car finance to payday lending²⁴.

The ombudsman receives complaints about guarantor loans from borrowers and guarantors³. Where a guarantor complains, it looks at whether the lender completed reasonable and proportionate checks before it lent to the borrower and agreed to the guarantor, and obtained the guarantor's agreement³. Where a complaint succeeds because the guarantor should not have been accepted, the usual outcome is that the guarantor is released from the guarantee, payments already made are refunded with interest, and information added to the credit file is removed³.

Where a borrower should not have been given the loan, the usual outcome is a refund of interest and charges paid, with interest, and removal of adverse information from the credit file. If there is still a balance, all interest and charges are removed so the balance is only what was lent, deducting payments already made, with any overpayment refunded with interest³. Where a balance remains after those adjustments, it is usually fair for the borrower to pay it back, though in some rare instances the ombudsman may not think this is fair³.

A guarantor can ask to be removed if the loan was unaffordable for the borrower, if they could not afford to repay it, if they were pressured, if the implications were not explained, if other financial links were not considered, or if top-up responsibility was not made clear¹⁰. If the loan was unaffordable, a refund of any interest paid plus 8% statutory interest is due, and the refund goes to the borrower or the guarantor if they have had to make some payments¹⁰. If still repaying, only what was borrowed has to be repaid, with no interest and an affordable repayment plan¹⁰.

The complaint itself should not affect the guarantor, and they should not be told that a complaint has been made¹⁰. It should be possible to get any court action put on hold while the complaint is considered by either the lender or the Financial Ombudsman¹⁰.

Complaint volumes give a sense of scale. In Q3 2025/26 the ombudsman recorded 21 new guarantor loan complaints²⁹. In Q1 2025/26 the uphold rate for guarantor loans was 52%⁴. Across the wider consumer credit market, the ombudsman handled 21,600 unaffordable lending complaints in Q1 2024/25⁴. One case study concerned a borrower whose complaint led to the ombudsman ordering the removal of a negative judgement from her credit file³⁰. Another found that the loan company had not carried out enough checks before granting the loan, and that a proportionate assessment of income and expenditure would have shown the loan was not affordable or sustainable¹².

For the full process, see complaining about a lender or finance company and complaining about an unaffordable loan. There is a dedicated page on complaining your guarantor loan was unaffordable.

How long guarantor loans last, and what happens at the end

One lender describes repayment terms of usually between one and seven years⁶. A credit union product caps its maximum loan term at 60 months¹⁷. Larger loans take several years to pay back². Secured loans, which are a different product, tend to run for shorter periods, for example 5 or 10 years³¹.

There is a two-week cooling-off period during which the guarantor can give the loan back to the lender⁶. After that, the guarantee stands. One lender states that a guarantor can only be changed during the loan application process, and that once the loan has been paid out the guarantor cannot be changed¹⁶.

If you are considering acting as a guarantor, the guidance is to get independent legal advice and talk to a mortgage adviser before agreeing³³. For the wider picture on borrowing in two names, see joint loans and guarantor loans and being a guarantor.