Guarantor Loans: Risks

A guarantor loan is a form of credit where a third party—the guarantor—agrees to become legally responsible for repaying the debt if the borrower fails to do so. This arrangement allows individuals with poor or limited credit histories to access finance, but it creates significant legal and financial obligations for the guarantor. Understanding these risks is essential before agreeing to act as a guarantor, as the consequences of default can be severe and long-lasting.

If you act as a guarantor and the borrower defaults, you become liable for the full outstanding amount of the loan, including principal, interest, and fees. If the borrower misses payments or defaults, adverse information may be recorded on your credit file as well as theirs, even if you have not yet been called upon to repay. In extreme cases involving guarantor mortgages, your home may be at risk if the guarantee is secured against your property. Under FCA rules, lenders must assess whether you can afford to repay the loan if called upon and must explain the circumstances under which the guarantee may be triggered and the legal consequences you may face.

When someone applies for a guarantor loan, the lender requires a third party to sign a legal agreement promising to repay the debt if the borrower cannot or will not. This guarantee is a binding contract. Under section 189 of the Consumer Credit Act 1974, 'security' includes a guarantee or indemnity, and the person providing it is known as the 'surety'. Any security provided in relation to a regulated agreement must be expressed in writing, with form and content defined by the Consumer Credit (Guarantees and Indemnities) Regulations 1983.

The Financial Conduct Authority regulates guarantor loans through its Consumer Credit sourcebook (CONC), which was amended in November 2015 via Policy Statement 15/23. These rules cover affordability assessments, explanations to guarantors, continuous payment authorities, and recovery procedures. Before accepting you as a guarantor, lenders must carry out a proportionate affordability assessment to ensure you will be able to make loan repayments if called upon. This requirement applies to the guarantor independently of any checks on the borrower.

Lenders must also provide you with an adequate explanation before you sign the guarantee. This explanation must cover two key areas: the circumstances in which the guarantee may be called on, and the implications for you if that happens. According to published guidance, where legal consequences such as charging orders or attachment of earnings orders are realistic possibilities, lenders must explain these to you. The adequacy of this explanation is assessed by the Financial Ombudsman Service based on the channel used, the actual and potential costs, and the risks you face.

If the borrower defaults—meaning they fail to make repayments on the loan—your liability is triggered. At this point, the lender may pursue you for repayment. The lender is not necessarily required to exhaust all remedies against the borrower before contacting you, though the precise order of enforcement may vary depending on the loan agreement. Once the guarantee is called, you are responsible for the full outstanding amount, not just a portion of it.

Both the borrower's and your credit files will be affected by the loan. If the borrower defaults, adverse information will be recorded on both credit files, which may damage both credit scores. This happens regardless of whether you have actually been required to make any payments. The credit file link reflects the legal connection created by the guarantee. For more on how defaults affect your credit file, see our guide on default notices and what happens next.

The Consumer Credit Act 1974 sets out formal requirements for enforcing guarantees. Section 87 requires a default notice to be served on the borrower before the lender can enforce the security, and section 111 requires a copy of this notice to be served on you as the guarantor. The default notice must give at least 14 days before enforcement action can begin. The form and content of these notices are defined by the Consumer Credit (Enforcement, Default and Termination Notices) Regulations 1983.

In some cases, lenders may use an alternative procedure. Instead of issuing a default notice, they may pre-notify you in writing of the breach details, the overdue amount, and their intent to take payment via continuous payment authority or direct debit. If they choose this route, they must wait a reasonable period—at least five working days—to allow you to cancel the payment authority. This notification must be clear, fair, and not misleading.

According to FCA guidance (FG 17/1), if you voluntarily make a payment following notification of the borrower's default, without any compulsion from the lender, no default notice is required. However, if the lender demands payment or takes coercive action, the formal notice requirements apply.

Misconception: Being a guarantor does not affect your own creditworthiness or ability to borrow.

Why this is wrong: Both your credit file and the borrower's are affected by the loan. If the borrower defaults, adverse information may be recorded on your credit file even if you have not yet been called upon to repay. This may make it more difficult for you to obtain credit in the future.

What is true: The guarantee creates a legal and financial connection between you and the borrower that is reflected on your credit file and visible to future lenders. Your creditworthiness may be directly affected by the borrower's conduct. If you are concerned about how this might affect a future mortgage application, see our guide on how joint debt rules work.

Misconception: Your liability as a guarantor is limited to a portion of the loan or only applies in certain circumstances.

Why this is wrong: The guarantee typically makes you liable for the full outstanding amount of the loan, including principal, accrued interest, and any fees. There is no automatic cap or limitation unless explicitly stated in the guarantee agreement.

What is true: You are taking on the same financial obligation as the borrower. If the borrower defaults, you may be required to repay the full outstanding amount, including principal, interest, and fees.

Misconception: The lender must try to recover the debt from the borrower before contacting you.

Why this is wrong: While lenders must follow formal notice procedures, they are not necessarily required to exhaust all remedies against the borrower before pursuing you. The guarantee gives them the right to seek repayment from you once the borrower defaults.

What is true: The lender may pursue you for repayment without necessarily having taken all possible action against the borrower first. The precise order of enforcement depends on the loan agreement and the lender's policies. For more on how enforcement works in practice, see our guide on priority debts and how enforcement actually works.

The Financial Ombudsman Service has the authority to unwind guarantor agreements if it finds that you were unfairly accepted. This can happen in two main scenarios: if the lender failed to obtain your proper informed consent, or if reasonable and proportionate checks would have shown that you could not sustainably repay the loan if called upon. In such cases, the FOS will likely order the lender to release you from the guarantee and refund any payments you have made, plus interest.

If the FOS determines that a lender should have realised that further lending was clearly unsustainable, it will likely order the lender to remove the further lending from your credit file completely. This remedy applies to both borrowers and guarantors and is designed to address irresponsible lending.

In some guarantor loan arrangements, the explanation to the guarantor can be provided by an independent third party, such as a lawyer or credit broker, instead of the lender directly. This is permitted under CONC rules for pre-contractual explanations.

For guarantor mortgages specifically, some products allow borrowing up to 100% of the property's value, meaning no deposit is required from the borrower. These mortgages carry higher interest rates than standard mortgages because the lender perceives greater risk. If the guarantee is secured against your own property and the borrower defaults, your home may be at risk if the sale of the borrower's property does not cover the outstanding debt. This is an extreme but realistic consequence of certain guarantor mortgage arrangements.

Where a guarantor mortgage is backed by your savings rather than your property, the savings are typically deposited into a special account held by the lender. You cannot access these savings during the loan term, and in most cases you will not earn interest on them. If the borrower defaults, your savings may be used to cover the shortfall, resulting in a direct loss of capital.

Consider a scenario where a family member asks you to act as guarantor for a £10,000 personal loan over five years. The lender assesses your income and expenditure and determines you could afford the monthly repayments if required. You receive an explanation covering when the guarantee might be called and what would happen if it is. You sign the agreement.

Two years later, the borrower loses their job and stops making payments. The lender serves a default notice on both the borrower and you, giving 14 days' notice. After this period, the lender contacts you demanding repayment of the outstanding balance, which now stands at approximately £6,500 including interest and fees. You are legally obliged to pay this amount. If you cannot pay it in full, the lender may agree to a repayment plan, but they are not required to do so.

At the same time, the default is recorded on both your credit file and the borrower's. Your [credit score](/guide/affordability-vs-credit-score) may drop significantly. If you were to apply for a mortgage, the lender would see the default and the outstanding guarantee on your credit file, which could affect the terms on which credit is available to you.

If you fail to repay the guarantee, the lender may pursue legal remedies. These can include applying for a charging order against your property (if you own one) or an attachment of earnings order against your salary. These are serious legal consequences that can affect your assets and income for years.

Now consider a guarantor mortgage scenario. Your adult child cannot get a mortgage due to limited credit history. You agree to act as guarantor, and the lender requires you to place £15,000 of your savings into a restricted account as security. Your child borrows £150,000 to buy a flat. Three years later, your child loses their job and defaults on the mortgage. The lender repossesses and sells the flat, but due to a fall in property values, the sale only raises £140,000. The outstanding mortgage balance is £145,000. The lender uses your £15,000 savings to cover part of the shortfall. You have lost your savings, and you are still liable for the remaining £5,000 plus costs.

These examples illustrate how guarantor loans create interconnected financial obligations. Your financial security becomes dependent on the borrower's ability and willingness to repay. Unexpected life events—such as job loss, illness, or business failure—can weaken either party's financial position, triggering consequences for both. If you find yourself in a situation where payments have stopped, our guide on what to do if you are a guarantor and payments stop explains the immediate steps to take.

Can I withdraw from a guarantee if my circumstances change?

The process for withdrawing from a guarantee is not straightforward and is not explicitly addressed in consumer credit regulations. In most cases, you remain legally bound for the full term of the loan unless the lender, borrower, and you all agree to release you from the obligation. If you believe you were unfairly accepted as a guarantor, you can complain to the Financial Ombudsman Service.

Will being a guarantor affect my ability to get a mortgage?

The guarantee will be reflected on your credit file, and mortgage lenders will generally take it into account when assessing affordability. They may treat the guarantee as a potential liability. If the borrower has defaulted, the adverse information on your credit file may further affect how lenders assess your application. The precise impact will depend on the lender's own criteria and policies. For more on how lenders assess your application, see our guide on affordability vs credit score.

What happens if the borrower dies or becomes bankrupt?

If the borrower dies, their estate is responsible for the debt. If the estate cannot cover it, you as guarantor remain liable for the outstanding amount. If the borrower is declared bankrupt, the debt may be written off for them, but your guarantee typically remains enforceable. You would still be required to repay the full amount.

Do guarantor loans typically have higher interest rates?

In most cases, yes. Guarantor loans typically carry higher interest rates than standard loans because lenders perceive them as higher risk, even with the guarantee in place. This means both the borrower and potentially you, if called upon, will pay more in interest over the life of the loan.

Can the lender take my home if I am a guarantor?

This depends on the type of guarantee. If the guarantee is secured against your property (as in some guarantor mortgage arrangements), your home may be at risk if the borrower defaults and the sale of their property does not cover the debt. If the guarantee is unsecured, the lender cannot automatically take your home, but they may apply for a charging order against it if you fail to repay.

• As a guarantor, you accept full legal responsibility for repaying the loan if the borrower defaults, including all principal, interest, and fees.
• If the borrower defaults, adverse information may be recorded on your credit file regardless of whether you have been called upon to pay.
• Lenders must assess your ability to repay the loan and explain the circumstances and consequences of the guarantee being called, including potential legal remedies.
• If you cannot repay a called guarantee, lenders may pursue charging orders, attachment of earnings, or other legal action against you.
• For guarantor mortgages secured against your property or savings, you risk losing your home or capital if the borrower defaults.
• The Financial Ombudsman Service can release you from a guarantee if you were unfairly accepted due to inadequate checks or lack of informed consent.
• Guarantor loans typically carry higher interest rates than standard loans, increasing the total cost of borrowing.

Related: If You're a Guarantor and Payments Stop | Joint Debt Rules: Who Is Liable? | How Long Defaults Stay on Your File.