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Many people struggle to secure credit and using a guarantor, such as a partner, friend or relative, is one possible solution. However, being a guarantor for someone’s loan comes with risks that you need to be aware of.
What does a guarantor do?
A guarantor promises to pay someone else’s personal loan, rental agreement or sometimes a mortgage if the borrower defaults on the agreed payments. They commit to covering repayments or even repaying an entire loan if the borrower isn’t able to.
If you agree to be a guarantor for a loan, you will need to sign a guarantor agreement alongside the borrower. Being a guarantor is a generous thing to do, but it’s vital to be fully aware of the risks and requirements involved.
Benefits of being a guarantor
If you guarantee a loan, you can help someone close to you who might struggle to borrow on their own. A guarantor is most often someone who knows the person taking out the loan well. This might be a parent, sibling, godparent or close friend.
It could also offer a way for the borrower to build up a good credit score if they meet all the repayments.
Who can be a guarantor?
To be a guarantor for a loan, you’ll usually need to:
- be over 18 or 21, and under 75
- have a good credit history
- be financially stable
- be a UK resident with a UK bank account
You are more likely to be accepted as a guarantor if you own your own home, even if you have a mortgage. But lenders’ criteria can vary, so always check the details for becoming a guarantor.
For example, some lenders say that you and the borrower can’t be financially connected – sharing a bank account, for example – which can rule out partners. However, other lenders allow partners but make extra checks to ensure that taking out a loan wouldn’t put either party under too much financial strain, or affect your ability to repay the debt if your partner fails to do so.
Do guarantors get credit checked?
Yes, if you’re a guarantor the lender will run a credit check on you. This gives an overview of your financial history. Your credit score will be affected if the borrower ends up defaulting on the loan, or if you don’t repay the debt if it falls to you.
If you’re thinking of being a guarantor, it’s a good idea to consider if you might need any credit in the future such as a mortgage. That’s because lenders will consider the guarantor loan as part of your own financial situation and it might make it less easy to get credit for yourself.
Risks of being a loan guarantor
As a potential guarantor, weighing up the risks is perhaps the most important consideration for you. It’s easy to feel pressure from the borrower you are helping to sign a guarantor agreement, but it’s important to make sure the terms also sit well with you.
Liability to cover loan repayments
Being liable to repay the loan is a fundamental part of being a guarantor. If you’re not 100% happy with covering the repayments due, then you might not want to agree to be a guarantor. There is always a chance the borrower will default, however good their intentions, and you will be legally obliged to stump up the cash owed. That’s the original loan amount plus interest, and any other charges for missed payments.
It could affect your credit score
If the borrower you are supporting defaults on the loan repayments, it could have a negative impact on your own credit record. This is because, as the guarantor, you will take full responsibility for the loan.
And if you then fail to step up to cover the late payment, there will be further damage to your credit score.
Debt recovery and CCJs
If you don’t fulfil your legal obligations as a guarantor, the loan provider may start a debt recovery process which could lead to a county court judgment (CCJ). This will make it difficult for you to get credit as a CCJ stays on your credit file for six years.
If you can’t make the repayments, then you could even lose your home if you used this as security for the loan when signing as a guarantor. Even if your house isn’t used to secure the loan, if the lender issues a CCJ it could ask for a charging order against your home and even force a sale. However, orders for sale aren’t common and are considered a last resort.
Other guarantor considerations
Being a guarantor is not something to be taken lightly. But if you make sure you have all the facts before agreeing to take on the role, it can be useful for the person who needs your support. Some other issues which guarantors should consider before signing up are:
Can a guarantor be removed from a loan?
In short, no. Once the loan agreement is signed, the only way that the guarantor can be relieved from the responsibility of the loan is if they or the borrower pays off the loan early.
Most loans can be repaid early, but you might get charged an early repayment fee or extra interest. You also can’t change guarantors mid-loan as the loan will have been agreed based on your credit score and financial circumstances.
If the loan in question is long-term, such as a mortgage, the borrower might build up enough equity to be able to remortgage on their own several years into the loan.
Guarantor loan complaints
The Financial Ombudsman Service (FOS) says it receives complaints about guarantor loans from borrowers and guarantors.
Common complaints from guarantors include:
- feeling pressured into acting as a guarantor
- not understanding that they would have to meet the repayments if the borrower didn’t
- not being able to afford the payments when it falls to them
If you want to make a complaint about a guarantor loan, the FOS recommends that you should first talk to the lender to try to resolve the situation. If that doesn’t work, you can contact them.
How many loans can I guarantee?
If you pass the relevant affordability and credit checks, you can act as a guarantor for several loans, if you choose to. But remember that with each loan comes an element of financial risk.
Before signing up to act as a guarantor for more than one loan, ask yourself whether you could meet all the monthly repayments if all the loan repayments defaulted at the same time.
Does a guarantor have to be a homeowner?
Not always, but it will add strength to the application if you own your home with or without a mortgage, as it suggests you are financially stable. If you aren’t a homeowner, you may be asked for other information, such as proof of income, which might mean supplying recent payslips or a tax return.
Guarantor loans for non-homeowners are available, so it is possible to be a guarantor if you are a tenant. Though without that extra security it might reduce the borrower’s choice of lenders and reduce their chance of being accepted. They may also be offered higher interest rates and lower loan amounts.
Who needs a guarantor?
Anyone who needs credit but doesn’t have assets they can secure a loan against might consider having a guarantor. Equally, borrowers with poor credit scores, a low income, or who have no credit history, may be unable to find lenders willing to offer them a loan without a third party who will put their own finances forward as security.
It’s not just someone with past debt problems and a poor credit history who might need the help of a guarantor, though. Guarantors can help people who are struggling to find a lender willing to consider their situation, but they can also simply help a family member or friend to secure a larger loan or better terms and interest rates – and in the process, build up their credit history as they pay off the loan.
Bear in mind that guarantor loans can be an expensive way to borrow, though. Interest rates are usually much higher than standard personal loans.
How to guarantee a personal loan
While you’re not the one taking out the loan, you may want to do some research into the terms and rates offered by lenders. You can use comparison tools to help you do this. As well as the loan amount and term it will be paid off over, consider details such as any fees for early repayment and the total cost of the loan.
During the application process, you’ll be asked to supply a proof of ID and basic financial information, such as recent bank statements and proof of income. If the application is accepted, the loan may be transferred into your account for you to transfer it to the borrower. If this is the case you will have a 14-day cooling-off period when if you change your mind you can tell the lender and return the loan, though you may be charged interest.
It might also be worth considering whether a guarantor loan is the best route for the borrower. Try to get comfortable talking about finances with them. Do they need the loan, can they afford it, and do they have a reliable repayment plan? Make sure you’ve both thought about how it might affect your relationship if they have trouble paying later on.
» MORE: Ways to improve a credit score
Image source: Getty Images
References
- Keeping pace with rising costs – improving financial inclusion for consumers https://www.fca.org.uk/news/speeches/keeping-pace-rising-costs-improving-financial-inclusion-consumers#:~:text=Credit%20can%20be,pre-pandemic%20average FCA
- Guarantor loan debts https://www.stepchange.org/debt-info/being-a-guarantor.aspx#:~:text=mortgages%20or%20loan%3F-,The%20full%20amount%20borrowed,than%20other%20personal%20loans Step Change
- Guarantor loans https://www.financial-ombudsman.org.uk/consumers/complaints-can-help/credit-borrowing-money/guarantor-loans Financial Ombudsman Service
Dive even deeper
Can I be a Guarantor with Bad Credit?
Loans with a Guarantor: How Do Guarantor Loans Work?
by Tim Leonard