Being a loan guarantor is a serious responsibility. If the person you¡¯re guaranteeing is not able to make repayments on the loan then it will become your responsibility to do so. There can be some serious consequences to being unable to meet your obligations as a loan guarantor, including damaging your credit score. So, it¡¯s crucial that you have thoroughly thought through whether you should act as a guarantor before anything gets signed.
What does a guarantor actually do?
Hopefully, nothing. If the borrower you¡¯re guaranteeing makes all the repayments on their loan then you shouldn¡¯t have to do anything at all. However, all this changes if that person starts missing payments. When you sign up to be a guarantor you are basically agreeing to step into the shoes of the borrower if they¡¯re not able to keep up with the repayments. So, if there comes a point at which that person stops making payments, under the terms of the guarantee the lender will be entitled to request that you make them instead. That could be one payment or it could be the entirety of the outstanding balance of the loan, including interest.
Why might a lender ask for a guarantor?
Guarantors provide additional security for lenders where a borrower appears to be a credit risk e.g.
- The borrower has no credit history at all
- The borrower has a low credit score or has had issues making repayments in the past
- The borrower has a low income
- The borrower already has a lot of other debt
Who can be a guarantor?
In theory, anyone over the age of 18 can be a guarantor for someone else. However, most lenders have their own criteria. Given that, as a guarantor, you are providing back up for a borrower who may be a credit risk you will need to have a positive credit history and no repayment issues in the past. Some lenders ask that guarantors are homeowners or have a specific level of income. You may need to be in full-time employment and most lenders will require a guarantor to be based in the UK. There may also need to be evidence of the separation between you and the borrower, for example, you are not married and don¡¯t have any shared financial accounts.
Can you back out once you¡¯ve agreed to be a guarantor?
If you haven¡¯t signed anything then yes you can. However, as soon as you sign the guarantee you will remain a guarantor for the debt until it has been repaid. That¡¯s why it¡¯s so important to ensure that you¡¯re prepared to be a guarantor before you agree to do it. When you¡¯re evaluating your options it¡¯s crucial to consider the following:
- Can you afford to make the loan repayments yourself? If you were asked to repay the loan would you still have enough income to cover your own financial obligations, such as rent or mortgage and essential monthly outgoings?
- Have you read the guarantee documents? It¡¯s essential to do this in detail to make sure you understand all the circumstances in which you could potentially be called upon to make payments. For example, if the borrower dies suddenly then the responsibility for repaying the loan could fall to you depending on what the guarantee documents say.
- Are you aware of the potential risk to your credit score? Being a guarantor won¡¯t appear on your credit history. However, if you miss repayments on the loan then this will become part of your credit record.
- Do you understand what will happen if you can¡¯t repay the loan? As well as damage to your credit score, you could be taken to court by the lender who may even have the right to repossess your home, or other possessions, to cover what is owed.
- How well do you know the person you¡¯re guaranteeing? It¡¯s essential to familiarise yourself with their finances to make sure they actually have the resources to make repayments on the loan. Are they the type of person who will take the obligation seriously or are they likely to borrow the money and then leave you to pick up the debt?
When you agree to be a guarantor the lender will run a series of checks to ensure that you¡¯re creditworthy and the right person to support the borrowing. Remember that, even if the lender agrees to you being a guarantor, you don¡¯t have to do it. You can say no at any time (up to the point you sign the agreement) and, if you have serious doubts about guaranteeing someone else¡¯s debt, then it might be a good idea to step back.