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Should You Agree to Be a Loan Guarantor?

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. 

What is 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.

Why Do 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. 

Who Can 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. 

What 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. 

Can 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. 

Does 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 instead. 

What to 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.