A large number of people struggle to secure credit and using a guarantor is a popular solution. However, acting as a guarantor for someone’s loan comes with risks that you need to be aware of.
What does a guarantor do?
Put most simply, a guarantor puts themselves forward as security for another person’s loan. A guarantor is usually a close relative or friend of the borrower. They commit to covering repayments or even repaying an entire loan if the borrower should default.
As a guarantor, you will need to sign a credit agreement alongside the borrower and you will be called upon to cover repayments should the borrower default.
Being a guarantor is a generous thing to do, but it’s vital to be fully aware of the risks and requirements involved.
Guarantors allow people with poor credit ratings and without equity against which to secure a loan to obtain credit that could provide them with opportunities or solutions. In some cases, guarantors help people pay for important life events or buy much-needed items, such as a car or household appliances. They might help family members to borrow cash for study, home improvements or for essential repairs or maintenance.
Being a guarantor is a generous thing to do, but it’s vital to be fully aware of the risks and requirements involved before signing on the dotted line. Who might need a guarantor?
Who might need a guarantor?
It’s not just people with past debt problems and poor credit ratings that need the help of a guarantor from time to time. Guarantors do help people who are struggling to find a lender willing to consider their situation, but they can also simply help a family member or friend to secure a larger loan or better terms and rates.
Anyone who needs credit but doesn’t have equity against which to secure a loan may benefit from having a guarantor. Equally, borrowers with poor credit ratings are often unable to find lenders willing to offer them a loan without the involvement of a third party who will put their own finances forward as security.
Borrowers who can sign a credit agreement alongside a guarantor might be able to choose from a larger list of loan options or from better loan terms and interest rates than those without a guarantor. Borrowers may also be able to take out much larger loans with the help of a guarantor.
Who can be a guarantor?
Being a guarantor is a major responsibility but providing you have a good credit score and/or, in most cases, own your own home and are aware of the risks involved, you can act as a guarantor. It obviously makes sense to be a guarantor for someone you trust will make the necessary repayments, as it will fall on you to cover any defaults with your own cash.
Who offers guarantor loans?
Guarantor loans are offered by a variety of lenders and it pays to carry out some research into the market to ensure you are working with the right lender. In addition, the range of guarantor loans on offer is equally daunting, with interest rates ranging from reasonable to quite high, so make sure you shop around to find the product that works for you, as the guarantor, as well as the borrower.
Indeed, as the guarantor, you want to pay special attention to the terms and rates being offered by lenders before you agree to support your loved one or friend who is borrowing.
Many high street lenders offer guarantor loans to borrowers, but there is also a range of lenders who now specialise in this type of lending. It’s up to you to do the research you need to, to make sure you understand what you are signed up to.
- Reputation of the lender
- Interest rates offered
- Terms offered
- Approval times
- Loan amount
- Length of the loan term
So what are the main risks involved?
This is perhaps the most important consideration for you, as a prospective guarantor. It’s easy to feel pressured from the borrower you are helping out to sign a credit agreement that suits their needs. However, it’s important to ensure the terms also sit well with you.
Liability to cover repayments
This is a fundamental part of being a guarantor. If you’re not 100 per cent happy with covering the repayments due, then you might not want to agree to be a guarantor. There is, after all, always a chance the borrower will default, however good their intentions, and you will be legally obliged to stump up the cash owed in this scenario.
Damage to your credit rating
If the borrower you are supporting defaults on the loan, you could see a negative impact on your credit record. This is because, as the guarantor of the credit agreement, you take full responsibility for the loan despite not receiving any of the funds.
Furthermore, if you then fail to step up to cover the late payment, there will be further damage to your credit score.
Debt recovery and CCJs
As a guarantor, and fully responsible for the loan, should you fail to fulfil your legal obligations you will be subject to the providers debt recovery policies which could, further down the line could mean county court judgements (CCJ’s, which will make it difficult to obtain credit in any form in the future.
There’s no getting away from the fact that the risks involved in becoming a guarantor are serious. However, providing you and the borrower you are supporting go into the process with your eyes open and with all the facts, you can minimise these risks.
Acting as a guarantor can help someone close to you to secure credit when they need it most, but it’s important that you ensure you are comfortable with the level of responsibility that this entails.
Remember as well, if there are repayment problems, it could cause personal problems between you and the borrower.