Are you unsure about what’s involved with a Guarantor loan?

If someone can’t take out a loan because of their Credit history, a guarantor can help them get one.

The type of people who might need a guarantor are:

• A young person who doesn’t have much of a credit history.
• Someone with a bad credit rating.
• Someone who’s just started a new job.
• Someone with a low salary.

Before we look at who can be a guarantor, let’s look at what does it means to become a guarantor?

What It Means to Be a Guarantor?

A guarantor is someone who steps in to help someone they know to take out any type of loan. By agreeing to be someone’s guarantor, you’re agreeing to make the repayments if the borrower doesn’t.

Once you’ve signed up to be a guarantor on a loan, you’re tied in. If the repayments have started, you can’t change your mind a few months later. This is because the lender would have taken your circumstances into account when they approved the loan. Once the loan is up and running, the guarantor is committed to making sure it gets paid back.

Not all lenders do a hard credit check on the guarantor, so the application shouldn’t affect their credit rating. However, if payments aren’t made and the loan falls into default, this would negatively affect their credit score.

The guarantor would be seen as having a financial connection with the borrower. This makes a difference if the guarantor wants to borrow any money in the future. Lenders look at any financial connections when approving a loan.

Who Can Be a Guarantor?

Anyone you know could be a guarantor for you when you take out a loan. They’re often a family member but they don’t have to be.

Each lender has their own rules about guarantors, but usually the following guidelines apply:

• The guarantor should be over the age of 21.
• They should have a good credit history.
• They would need to have a separate bank account to the borrower. Even if your spouse or partner is the guarantor, you’d still need to have separate bank accounts.

The lender would want to know that the guarantor could afford the repayments if the borrower didn’t pay them. The lender may ask the guarantor to provide proof that they work or they may also want to know about any savings or assets they have.

If You’re Thinking of Being a Guarantor

If you’re thinking of being a guarantor make sure you know everything about the loan and the repayments. Read through all the documents so you understand what you’re letting yourself in for.

Guarantor loans are personal loans for people with a low credit rating. As a result, the interest rates are higher than on standard loans. It’s worth comparing different guarantor loans to see who’s offering the best terms.

Check with the borrower that they can afford the repayments and that their financial situation isn’t about to change. You need to trust that they’ll pay back the loan.

If the borrower is unable to pay the loan repayments, be prepared to pay them yourself. Even if your circumstances change and you can’t afford the repayments, as the guarantor you’ll still be liable. You could put some money aside just in case the borrower can’t pay the loan back.

In Summary

Both the borrower and the guarantor should understand what they’re taking on with a guarantor loan. If you’re the borrower trying to improve your credit score , this may be a good solution for you. But if you stop paying, will this affect the relationship between you and the guarantor? Both of you need to be open and honest with each other from the start. Think carefully before committing to it.

Disclaimer: Please note, we are not providing financial advice. Our blogs are written for informational purposes only.