What does it actually mean if someone asks you to be a guarantor for them?
When you become a guarantor you are helping someone get access to a loan. By acting as guarantor you are responsible for any payments they can’t make until the end of the loan term.
It’s a big decision.
So why might someone need a guarantor loan?
People who have a poor credit history might use a guarantor to secure a loan as might people who have what’s known as a thin credit history. This might be students, for example, or people who have just not accessed credit services in the past. Without a background, a lender cannot picture what kind of risk you represent and therefore you may be refused a loan.
But how then do you get a loan without a credit history? And how do you get credit history without a loan?
That’s where you as a guarantor comes in.
The lender offers the credit on the basis that you, as creditor, will make up defaulted payments. As a guarantor you are guaranteeing for the loan until it is paid off.
That’s why the relationship between guarantor and borrower is hugely important and often one that is between close friends or immediate family members.
As a guarantor you are responsible for the loan if a borrower cannot pay. It can affect your own credit rating if it is unpaid, so you should ask questions first.
The first question is what do they need the loan for, followed by have they explored all the other options.
Often it’s for a car or house renovations. But it’s definitely worth asking both questions if you’re being asked to support a borrower’s application. Do they really need to borrow the money and what other options, other than guarantor loans, have they explored?
A guarantor loan often attracts a higher rate of interest compared to other loan types, so it’s definitely worth exploring all the options first.
Then you’ll want to know that they have the means to pay it back over the loan period, which is often years, rather than months.
These might be hard conversations but they’re important and it can help set the right approach if you do agree to be a guarantor.
It’s a trust-based agreement so you need to know that the person you are acting as guarantor for can be relied on to pay the debt.
More Things to Understand as a Guarantor
Your role as a guarantor remains as long as the loan exists. If the borrower were to die or need a debt management plan (such as an IVA) and couldn’t afford the loan, you would be responsible for the payments until the loan is cleared.
Nor can you stop being a guarantor until the debt is paid in full.
Being a guarantor doesn’t show on your credit file in the long term. The guarantor loan is taken out in the borrower’s name, but because a credit check is made on you as part of the process, it can affect your credit rating in the short term.
As long as the loan is paid back in full, it will not affect your rating in the long term.
Trust-based loans can help someone with a thin credit rating improve their score. But it’s also a financial commitment that’s a serious one. And perhaps what gets overlooked is how the relationship might turn out if there ever was a problem with the repayments.
As with any financial credit agreement in the UK, you have a 14-day cooling off period so if after agreeing to be a guarantor, you decide it’s not for you there is that option. And a good lender will talk you through any questions and ascertain whether you meet the affordability criteria to be a guarantor too.
Finally, you should never be pressured into becoming a guarantor.