By agreeing to be a guarantor means that you
are helping someone secure a loan that they need. It’s a serious financial
commitment to make because if they fail to make a repayment, then you will be
responsible for paying it back instead. But, how do guarantor loans work and what considerations should you think about before
committing to help someone secure one? Let’s take a look.
a Guarantor Required to Do?
As a guarantor, you are responsible for paying
back the loan if the borrower is unable to do so themselves. But, to be a
guarantor, the primary borrower needs to apply and be accepted for a specific
type of loan. Guarantor loans are generally designed for people who suffer from
bad credit, and most guarantors are either family members or close friends. If
the borrower misses just one single repayment, then the lender can chase you
for the money that is owed to them. Some lenders choose to pay the loan into
the guarantor’s bank account rather than the person who has applied for the
loan. In this scenario, the guarantor will need to transfer the loan to the
borrower’s bank account. If the borrower repays the loan each month and on
time, then the guarantor isn’t required to do anything.
Lenders Ask for Guarantors?
Lenders will ask for a guarantor if the person
applying for the loan has a bad credit score or is applying for a loan for the
very first time. Because of this, a guarantor must be more financially reliable
than the person applying for the loan. Lenders prefer guarantors to not be
financially linked with borrowers and be homeowners.
Act As a Guarantor?
To be a guarantor, you need to have a good
credit history, be financially stable and over 21 years old. You must be able
to prove that you can afford to pay back the loan if the borrower cannot do so
themselves. Lenders also prefer that guarantors do not have any financial links
with borrowers such as a joint bank account.
Are The Risks?
One of the biggest risks associated with
becoming a guarantor is having to pay back a loan when the original borrower
cannot afford to do so themselves. This is why it’s very important to make sure
that the primary borrower can afford the loan and always make the repayments on
time and in full. You also need to fully trust them because if they fail to pay
it, then it could have a negative effect on your own credit score. A bad credit
score will undoubtedly affect you gaining access to credit in the future should
you need to apply for it.
Guarantors Change Their Mind?
Unfortunately, the simple answer to this question is no. Once you have agreed to be a guarantor and signed the relevant paperwork, there is no way you can formally back out of the agreement. However, some lenders do offer a 14 day grace period where you can back out. In this scenario, the primary borrower will need to give back the entire value of the loan too. They are not allowed to keep any of the money with the original guarantor that signed the paperwork. If you feel like you have been miss-sold a loan you may be able to make an irresponsible lending complaint. either directly with the lender or with a claims management company.
Acting as a Guarantor Appear on a Credit Record?
Agreeing to be a guarantor will not appear on
a credit record. And, provided that the primary borrower makes the payments on
time and in full then your credit record will remain unaffected. However, the
majority of lenders will do a credit check so a search may be added to a potential
guarantor’s credit record. The loan may be added to your credit record only if
the borrower defaults and you are asked to pay back the loan on their behalf
Do If Asked to Be a Guarantor
Becoming a guarantor is a serious financial
responsibility, and if the primary borrower defaults on the repayments, then
the guarantor is liable to pay it instead. This is why it is so important for
both parties (especially, the guarantor) to fully understand their
responsibilities. If you are asked to be a guarantor, then you must not rush
into making a decision even if those asking are putting pressure on you. Spend
a reasonable amount of time weighing up the pros and cons and have a good think
about your personal financial situation. It is also a very good idea to
consider the relationship you have with the person who has asked you to be
their guarantor. If you are unsure about what to do, then you speak to a family
and get their second thought too. The most important thing is that you are
entirely comfortable and willing to act as a guarantor.