Becoming a guarantor means helping someone you know access to a loan. It should be someone you know very well. As the guarantor you’ll be asked to cover any payments that the borrower misses. But this aside you could be helping someone who has no credit history, or a thin credit history improve their score.
A guarantor loan helps people get a loan that they may not get through other routes such as banks or credit cards.
If you’ve been asked to be a guarantor there’s likely to be a few questions you have before you agree.
You should definitely explore what they need the money for.
Is it something urgent? Or is it something that could be saved for?
Have They Explored All the Options?
Make sure they have looked at all their options when it comes to other ways of borrowing money.
The purpose of being a guarantor is to agree to cover any missed payments. If the borrower were to default on the loan you would be responsible for the debt.
Interest rates with guarantor loans are usually much higher than more traditional forms of lending, so if you have savings, could you instead lend them the money. This would mean that person paying you a monthly sum.
It’s a trust-based agreement so you need to have trust that the person you are acting as guarantor for can be relied on to pay the debt. If it’s not someone you know well, such as an immediate family member, or someone you have no trust issues with, then you would be best to say no.
Likewise, if you cannot cover the whole debt you may wish to reconsider accepting any request to become a guarantor.
If the debtor cannot pay, you as the guarantor will be liable. While a reputable guarantor loan business should carry out comprehensive affordability checks, it’s best to avoid those circumstances altogether.
The Role of a Guarantor
The basic role of the guarantor is as a co-signer to the loan. You agree to pay back any missed payments or in the long term the entire loan if the debtor defaults on it.
It’s also worth noting that as the guarantor you are committed to support the debtor through the entire duration of the loan. You cannot stop being a guarantor unless the debt is paid in full. So, at any point the borrower cannot make a payment you will have to make sure it’s covered.
You are not the borrower so being a guarantor doesn’t show on your credit file long term. Any guarantor loans will be taken out in the borrower’s name, but it can still affect your credit score in the short term and for as long as 12 months after. This is because the company will carry out a search on your file which does have an impact.
The search is carried out with you as a guarantor, however, and not a borrower. In the long term, it will not affect your credit rating, because you are not the borrower – as long as the monthly payments are made on time and the whole loan is paid full at the end of the loan term.
Things to Know as a Guarantor
As a guarantor you are being trusted to repay the loan in the event the borrower cannot pay. Whilst the loan will be taken out in the borrower’s name, it can still affect your credit score in the short term and, in cases where the borrower doesn’t pay, in the long term too.
If the borrower was to die, enrol in an IVA or other debt management plan and was unable to pay the loan, as the guarantor you would be responsible for the payments until the loan is cleared.
If you’ve agreed to be the guarantor on a mortgage you won’t have to remain as a guarantor for the whole of the mortgage term, usually around 30 years. Once the borrower has built up enough equity, they will likely be offered the chance to remortgage and you can cease being a guarantor.
Being a guarantor can help out a person with a thin credit score or poor credit rating. But it’s also a serious financial commitment. That means you should always consider the risks before agreeing. As with any financial agreement in the UK, you have a 14-day cooling-off period, should you change your mind.
But you should do your research before you agree. You could ask a borrower to show you their payment plan along with their incoming and outgoing funds. You also have to consider that if problems did arise how it would affect your relationship with the borrower long term.