When applying for credit, one can either get approved or rejected depending on their credit history. For instance, if they have a bad or limited credit history, lenders will see them as risky borrowers and not approve their applications. There are several ways borrowers can counter bad credit status including building credit gradually or looking for a guarantor.
If you have been approached by someone who has been struggling to get credit so that you can be their guarantor, you have to know all the facts involved before you accept. A guarantor agreement has its own inherent risks and knowing the whole picture can help you make informed decisions. This guide will walk you through what it takes to be a guarantor.
Being a Guarantor; What Does it Mean?
The simplest and the most straightforward definition of a guarantor is someone who helps another gets the credit. The type of credit doesn’t really matter, it could be a guarantor loan UKs, car loan, mortgage, or any other type of credit.
When you are co-opted as a guarantor, it means you have an obligation to repay the debt in question should the borrower default. As a rule of thumb, you should only give consent to be a guarantor for someone you are familiar with. For this reason, parents have no problem guaranteeing their children as they take the first step towards homeownership or getting their first credit.
Who Can Be a Guarantor?
There is no criterion for someone to be a guarantor, but the law requires that they be at least 21 years old. As long as you have a separate bank account with the borrower, you can be a guarantor. Most often guarantors are parents, siblings, aunties, uncles, grandparents, spouses, or even friends.
As a guarantor, you must have a good credit history and be stable financially. This is the only way to pass good credit to the borrower. Guarantors who are homeowners have an added advantage in that they add more weight and credibility to the borrower credit application.
Reasons Someone Would Want You as a Guarantor
There are several reasons why someone may approach you to be their guarantor. Below are the most common:
- No Credit History – A person with no credit history who wants to get a loan may be turned down hence the need for a guarantor. In most cases, this could be a young person or an immigrant.
- Low Income – If you are on a low salary or your overall income is below a certain threshold, lenders may see you as being a risky borrower. With low income, you may struggle to repay debt.
- Low Credit Score – If you are bad credit, you may be rejected by lenders. One option you have is to improve your credit score, but this may take a bit of time. The only feasible route for immediate access to credit for such people is through a guarantor.
Before you give your consent to be a guarantor or enjoined to a guarantor agreement, you need to ask yourself the following questions.
Reason for a Guarantor – Ask yourself why they need you to be their guarantor. It could be any of the above reasons.
Ability to Manage Repayments – Carry out a quick assessment to determine if the borrower is able to plan and organise their credit repayments. If not, you are better off declining being a guarantor.
Genuine Need for the Loan – Ask the borrower if the only way out is for them to get credit. If they have an alternative route such as saving up for the need, they are better of going the savings way.
Risk of Strained Relationship – You must ask yourself if covering the borrower’s repayments as the guarantor will affect your relationship with the borrower.
If the borrower can’t keep their repayments, being a guarantor can cost you money. The other risk to being a guarantor is that your home may be repossessed if you fail to honour your obligation of repaying the borrower’s loan.
Duration of Being a Guarantor
One question that often gets asked by potential guarantors is whether they will remain as guarantors for the whole term of the loan. The answer to this depends on the structure of the loan and the agreement signed. If it is a 30-year mortgage, being a guarantor for the whole term may be impractical.
However, when looking at loans that last 3 to 5 years, you can have one guarantor covering the loan term. In the case of mortgages, the borrower will be building equity and after some time the loan agreement may allow for a remortgage and removal of the guarantor.
If you have signed a loan agreement as a guarantor and the loan has been approved, you can’t be removed unless there is a rider specifying the conditions under which you can stop being a guarantor. It is your credit history and financial status that made the loan to be approved and so you are a part of it.
Guarantor and Credit Rating
If you have bad credit, the lender may not accept you as a guarantor. As long as the borrower keeps on repaying their loan, your credit score will not take a hit. However, if they fail to honour their payments and the credit facility falls into default, as the guarantor you will also feel the impact on your credit file.
There is a misunderstanding on whether being a guarantor can affect your chances of getting a loan in future. The response to this is that lenders look at different aspects of your financial health such as income, expenditure, existing debt, loans you have repaid as a guarantor, and many other factors.
Though not common, being a guarantor can affect your chances of getting a credit facility due to outstanding guarantor obligations.
Being a guarantor is a financial commitment that you need to carefully review before signing up for it. Ensure you have attained the legal age of entering into contracts and the person you are guaranteeing is well known to you. Just to ensure you are on the safe side, run a series of checks on the borrower to see if they are really in need of the loan and whether they can be able to afford it.