What are your responsibilities as a guarantor for a loan?
Are you considering becoming a guarantor for someone? Perhaps it is because it is a close friend or family member is struggling with bad credit, making it difficult to for them to be able to get a loan or other forms of funding on their own, and you want to help them out and at the same time help to improve their score so they can access funding in the future without needing extra help. Whatever the reason, it is a kind gesture to make but you need to make sure that you are fully aware of the responsibilities that you have as a guarantor before becoming one, as there can be serious consequences. Here at Guarantor Loans, we take a look at the things you need to know.
What is a guarantor?
First things first, let’s discuss exactly what a guarantor is. Becoming a guarantor means that you are liable for the person taking out the loan. You sign a legally binding agreement that means that you are essentially responsible in the event that the borrower starts to default on repayments.
Why do lenders ask for guarantors
The reason why lenders may ask for a guarantor comes down to the borrower’s creditworthiness. If someone is applying for a guarantor loan, it means that they in all likelihood have a bad credit history that is making it difficult to get accepted for a loan on their own. A bad credit score does not give lenders confidence that the borrower will be able to make repayments if they approved their loan application. This is where the role of the guarantor becomes important as they restore trust that the loan will be paid back whatever the consequences.
What happens if the borrower doesn’t pay?
If for whatever reason the borrower becomes unable to make repayments at some point after the loan has been agreed, it could be the case that the lender will go directly to you in order to get paid if they believe that it will be easier to get the money from you than it would be by chasing the borrower. This would mean that you would then be legally obliged to pay on the borrowers behalf to the guarantor as it is part of a contractual agreement.
The risks involved in being a guarantor
As a guarantor, you have a number of responsibilities, which means that you also have potential risks that are involved too. We take a look at some of the main risks that are involved:
- If you have provided security for the loan (such as your car or your home) you need to be aware that you may end up losing these if you find yourself unable to make payments on behalf of the borrower
- Whilst you do not have the right to the amount borrowed by the person who is acting as a guarantor, you are still contractually responsible for making the repayments
- You will have to make payments under someone else’s debt, which means that it could be the case that the total amount you end up paying altogether could actually be more than the original loan with default fees and also interest too
- The lender has the right to pursue you (and in the worst case scenario take you to court) in the pursuit of the payments needing to be made
- If for any reason that you find yourself in financial difficulty and no longer able to pay as a result of repaying another person ‘s debt, then it could very well affect your own credit score, making it difficult to apply for a loan that is for you in the future
- If you end up having to make repayments and therefore out of pocket, it may end up impacting the relationship that you have with the borrower
How do I become a guarantor?
If you have decided that you would be willing to become someone’s guarantor whilst fully aware of the consequences and circumstances in which you do so and have you been asked to be one by a close family member or friend. You will need to fit the following eligibility criteria in order to be able to become one:
- You will need to have a good credit score. If you have a history of missed payments on your file or have been previously bankrupt, this will show up on your credit file and may make lenders less likely to consider you as a guarantor for someone else, as they may be concerned about your ability to make payments if the borrower couldn’t
- You will be required to have a stable income
- For most lenders, they will also require you to be a UK homeowner, or be over a certain threshold of equity in the property in order to be able to become a guarantor for a loan
- You will need to show proof that you are able to make repayments if the borrower cannot pay
- You will need to be the ages of 18-75
Can I stop being someone’s guarantor?
If you start to have cold feet about a guarantor loan that may end up lasting for nearly five years, or perhaps as you are no longer in contact or on good terms with the person , it is not possible to suddenly stop becoming someone’s guarantor if you have signed a loan agreement and this loan has also been paid out. Pretty much the only way you will be able to get out of the agreement is if the borrower pays off the entirety of the loan left which means that the contract has ended.
You will also not be able to be replaced, as the issue is that during the application process, the person who guarantees the loan plays an incredibly important role, essentially helping the lender decide whether to let the borrower have access to credit or not.