Guarantor car finance: affordable payments for young drivers
Struggling to get finance but have someone with a good credit score who's happy to help with a joint application? Try guarantor finance
Being accepted for car finance can mean the difference between driving around in a worn-out old car that keeps springing up unexpected bills and breaking down, and getting a reliable, modern, safe vehicle.
But if you're a young driver who's not borrowed money before, it can be difficult to convince lenders that you'll make your payments on time - since they can't check your track record of paying back any previous borrowing. So, being approved for car finance can be challenging.
That's where guarantor finance comes in. It involves adding a friend or family member with a reasonable credit score to your application, and it's their credit record that could help you to get approved. They'll need to trust you, though, because they will have to make monthly payments if you fail to.
With a guarantor on board, lenders are more likely to accept a finance application from young drivers. Guarantor finance is available for both new and used cars and it can be used in conjunction with new car offers, such as free insurance or Just Add Fuel deals, which include insurance, finance costs and servicing in one monthly payment.
Guarantor finance is designed for borrowers with little credit history, rather than anyone who is struggling for money, because monthly payments still need to be made on time each month. If you - the borrower - and your guarantor fail to meet the payments, it will damage both of your credit scores, making it harder for both of you to get credit in the future. Understand what you're signing up for, however, and it could be an affordable way to drive a newer car than you could otherwise afford.
If you're not sure whether you have a credit history or what your credit score is, check out the following articles to maximise your chances of being approved for car finance:
How does guarantor car finance work?
Whether you’re just starting your first job and need a reliable car to get there, or live miles from the nearest bus route and need your own transport, guarantor finance can help put you behind the wheel of a car for a reasonable interest rate and a relatively affordable monthly payment.
Your guarantor is effectively a safety net for lenders, providing greater reassurance that the money you borrow will be repaid in full and on time. If you don't meet a payment, they'll have to.
That’s why guarantors need to be reliable, with a strong history of repaying debt, such as credit card or mortgage bills, on time. They’ll usually need to own their own home, too.
Most importantly, guarantors must be willing to take on the responsibility of your car finance, guaranteeing that they will pay it if you fail to make your monthly payments. That’s why guarantors are normally either close friends or family members.
In most cases, guarantors should have nothing to do once the agreement has been signed. As long as you make all the payments on time, the finance will be cleared without any incident.
Apply for guarantor finance
Many young drivers may be accepted for finance on their own, without the need for a guarantor, so it's best to find a car that you like and then apply for finance in your name. However, if it looks like getting approved by yourself could prove tricky, this is where guarantor finance comes in.
Guarantor car finance for young drivers
If you’re a young driver, without much history of borrowing and repaying debt, then it’s common to use guarantor finance to get a car - something more reliable than the super-cheap type of car you'd otherwise have to buy with cash - which you may use to travel to work and build up your own credit history. In this situation, a parent would usually act as a guarantor.
Making payments on time will help you to improve your credit score, which could mean that you don't need a guarantor when you next apply for finance.
If you can afford the payments on a new car, then guarantors can be used to take out finance on a car that comes with free insurance. They can also be used with new car Just Add Fuel deals, which make it easier to budget by including most running costs and your finance payments in a single, fixed, monthly payment.
Do bear in mind, though - since new cars are so much more expensive than used equivalents - that while you may be getting insurance thrown in, this is likely to be more expensive overall than financing an equivalent used car and putting some of the savings aside to cover the cost of insurance.
Guarantor PCP and HP finance
The two most commonly used types of car finance - PCP and Hire Purchase - are available with a guarantor. Using these types of finance offers plenty of flexibility around your deposit, monthly payment, and what happens at the end of the agreement
Guarantor Personal Contract Purchase (PCP) finance is an affordable way of driving a new or used car because your monthly payments only cover part of the car's value - the amount it is expected to lose over the length of the contract. This means that you can afford the keys to a better or more modern car for a comparable monthly payment with Hire Purchase.
It also means that you don’t own the vehicle at the end of the contract - unless you choose to make what's known as the optional final payment. Alternatively, you can simply hand the car back. Return the car and there should be nothing extra to pay, provided you've kept it in good condition and stuck to the pre-agreed mileage limit.
Give the keys back and take out a new contract and in some cases, you may find the car is worth more than the remaining balance on the loan. This is referred to as having equity and means you can put the extra amount towards the finance deposit on your next car, which subsequently reduces the monthly payments on your new car.
Meanwhile, with guarantor Hire Purchase (HP) finance, monthly payments are higher, but once you've made the final monthly payment, the car is yours to keep. The deposit and monthly payments cover the entire cost of the car, including interest charges, spread across fixed monthly instalments. So, while HP monthly payments are higher than with PCP finance, with HP you don't have to make a large final payment to take ownership of the car at the end of the contract.
Guarantor car finance for 17-year-olds
Car finance typically isn’t available if you’re under 18, with or without a guarantor. If you don’t have the funds to buy a car with cash, then it’s still worth saving. This will enable you to put down a larger deposit when you do turn 18, reducing your monthly payments, and potentially giving you access to lower interest rates.
Guarantor car finance for 18-year-olds
From your 18th birthday, a range of finance options become available to you, including the PCP and HP finance formats explained above, as well as deals such as Just Add Fuel if you’re after a new car and a simpler way of managing the running costs.
It's certainly possible to take out finance at the age of 18 without a guarantor. You are more likely to get finance if you have a regular income and are listed on the electoral roll, however, which links you with a permanent address.
Many 18-year-olds, though, find that their lack of credit history - simply due to having less exposure to borrowing money and paying it back on time - works against them and, in this case, a guarantor with an established credit history can help.
Taking out guarantor finance and making car payments on time can help you to build up your credit score and improve your finance options in future, so it’s worth ensuring that you’ll be able to afford all of the payments throughout the agreement, even if you might be headed to university, for example, where your earnings could drop dramatically. Do this and you should end the finance contract with an improved likelihood of getting finance in your own name.
Guarantor car finance for 19- and 20-year-olds
By the time you reach the end of your teenage years, you may have a growing history of repaying debts, such as credit cards, on time. Combined with a regular income and registration on the electoral roll, you have every chance of securing car finance at a low rate.
However, your credit score may still be weak, so a guarantor could still be required. If that's the case, taking out guarantor finance and making all the payments on time should put you in a much better position at the end of the contract to take out finance in your name alone.
Who can become a guarantor?
A guarantor is someone who provides assurance to a lender that the monthly bill will always be paid, by being ready to step in with the money if you fail to make the payment on time.
The person doesn’t have to be anyone special to become a guarantor - usually this role is taken on by family members such as parents, or by friends who are in a more comfortable financial situation.
However, there are a few things to bear in mind. The guarantor will need to be over 21 in most cases (or 18 for certain lenders) and have a good credit history of their own to become a guarantor, and of course they need to be financially stable so that they can always meet payments if the worst happens and you fall behind.
The credit history of the guarantor will be checked by the lender before the loan goes ahead, just like if the guarantor were the one taking out the finance. This usually means that the guarantor will have to be in full-time employment, and will also have to have a UK bank account in order to be a guarantor.
Some lenders may also only accept guarantors that are homeowners, although this isn’t always the case - some lenders are happy to accept guarantors that are renting, though the guarantor may have to prove they’re in a stable situation and have lived at the same address for some time.
What are the risks of becoming a guarantor?
The reason why most guarantors are close family or friends is that there are risks that come with it. There’s no money to pay as a guarantor unless the borrower misses a payment - but if you as the borrower do fall behind, the guarantor will be obliged to make payments for you.
If the guarantor isn’t able to make the payment, then in that case they are put in the same situation as you - so they can face the same penalties including being taken to court or having assets seized. This means that the guarantor absolutely must be ready and able to make a missed payment every month if you fall behind.
If you fail to make a payment, even if the guarantor steps in and makes the payment on time, this can be noted on both of your credit history, which could cause borrowing problems for both parties in future. It’s a good idea for you and the guarantor to stay in touch and for you to flag any issues early - it is a much better course of action if they can help you make a payment on time than to let it go unpaid and for them to have to step in as the guarantor.
Guarantors can’t opt out once they’re involved in a guarantor loan by signing on the dotted line, so they need to be sure they are ready to help you out no matter what. They may also be responsible for paying the rest of the loan back if you were to die, although both of you should check with individual lenders and read the terms and conditions before committing to anything.
Finally, you and the guarantor should think about how them being a guarantor for you could affect your relationship should something go wrong. If you are in a situation where a friend or relative has to pay a chunk of money for you and it’s damaged their credit rating, you will need to have a strong bond with the guarantor to avoid causing permanent damage to your relationship.
If they're not ready to step in and help no matter what, then they shouldn't agree to being a guarantor, but if you know each other well enough that they trust that you won’t put them in that position - or know that you can work out any issues, should they arise - then guarantor finance could be a good option.
Missing finance payments can damage your credit score, whether there’s a guarantor involved or not. But before getting to that situation, it’s always best to get in touch with your lender if you think you're going to struggle to make any of the payments due. The lender may be able to make special arrangements for you, to help you avoid going into arrears - something which could leave a black mark on your credit history, potentially making it difficult and more expensive to take out finance in future.
If you stop repaying your finance agreement the lender is likely to initially contact you to check there hasn’t been an error, or whether there has been an emergency. With guarantor finance, however, it's not just the main person taking out the finance who is likely to be contacted. The lender can also chase the guarantor for the unpaid debt.
A word of warning: if you miss your payments and the guarantor fails to repay, the car can be seized and both of you might end up in court, with the threat of County Court Judgements and damaged credit scores. Therefore, it's best to put some money aside at the start of the contract - enough to cover several monthly payments should you encounter difficulties, if you can - and talk to the lender early if you suspect that you may struggle to meet payments in the near future.
*Representative PCP finance - Ford Fiesta:
48 monthly payments of £192
Mileage limit: 8,000 per year
Optional final payment to buy car: £2,923
Total amount payable to buy car: £11,926
Total cost of credit: £2,426
Amount borrowed: £9,500
BuyaCar is a credit broker, not a lender. Our rates start from 6.9% APR. The rate you are offered will depend on your individual circumstances.