What is involved in being a guarantor for a loan?

Follow by Email

If you are eligible to act as a guarantor on a loan, you could not only help out a friend or family to obtain the money that they need, but also you could help them rebuild their credit score.

Before agreeing to become a guarantor, there are several things you should consider, as the loan could impact your own credit rating and financial security should the applicant struggle to make repayments. Here are a few questions any potential guarantor should ask:

Why does the applicant need a guarantor?

People applying for guarantor loans often do so because they cannot secure credit on their own from banks or other lenders due to a poor credit history; others may struggle to qualify for credit due to having no credit history. Consider why a person asking you to be their guarantor needs a guarantor loan in the first place – is it because they have a history of defaulting on debts and a poor credit score? If so, you need to think carefully about whether he or she will be able to comfortably afford to repay the loan and consider how likely it is that you will become liable for the repayments. Or does the applicant need a guarantor because they have no credit history? Young people moving out for the first time or beginning their first job may be more than able to repay a loan, but might struggle to secure credit due to a lack of credit history, even though they are financially savvy and earn a good income – meaning less risk for you as a guarantor.

What is the loan for?

If you are considering becoming a guarantor, you have a right to know what the loan will be used for – and it is important to discuss the loan amount and purpose with the applicant. Is the loan to help renovate a property, buy a car for work or other make another worthwhile investment, or is it for a more frivolous purchase like a new television or luxury holiday?

What are the terms of the loan?

Make sure you consider the terms and conditions of the loan and understand them fully before signing as a guarantor. Compare interest rates and repayments – can the applicant comfortably afford the repayments as well as their day-to-day expenses, or will they struggle? Make sure you understand exactly what your responsibilities are as a guarantor, and what could happen if the applicant defaults.

Are you able to repay the debt if the applicant cannot?

You may trust the applicant to repay the loan – but as a guarantor, you need to be prepared for the fact that you may become liable for repayments. Can you afford to repay the debt if the applicant cannot? Failure to make the repayments or repay the loan could result in both you and the applicant being taken to court by the lender, or a CCJ on your credit file, and your own credit rating being harmed.

Are you comfortable in risking your own credit rating?

By agreeing to become a guarantor, you are offsetting the increased risk of lending to an applicant with a poor credit history by offering up your better credit rating as a form of ‘insurance’. In doing so, you risk your own credit rating and financial security should the applicant default – if you do not feel comfortable doing this, you should not become a guarantor. You can be a guarantor for a friend, family member, spouse, partner or someone you work with– consider the effect the loan may have on your relationship with them should things go wrong. Is it a risk you are willing to take?

Becoming a guarantor is a serious financial decision – discuss the loan in detail with the applicant, ensure you understand the terms and conditions and financial consequences and feel comfortable in agreeing to the role before you proceed.