Getting a personal loan comes with its own set of challenges. If you have a below-average credit profile and have applied for a personal loan, you must be familiar with the term ‘guarantor’. A guarantor is someone who co-signs a loan and partakes in the obligations along with you. Lenders are likely to ask for a guarantor from an applicant whose credit score is below-par. But there’s a lot to consider before co-signing a loan with someone. What if you want to stop being a guarantor? Could you get a CCJ for a guarantor loan? We’ve discussed some of the most frequently asked questions about guarantor loans here.
Guarantor loans are ideal for someone with a below-average credit score, seeking some financial aid. By co-signing the guarantor loan agreement, a guarantor agrees that they can be held liable if the borrower defaults. Thus, not only does a guarantor witness the agreement between a lender and a borrower but they also ‘guarantee’ that the borrower will repay the loan. However, the guarantor is held accountable in case a borrower fails to oblige to the loan’s terms.
Unfortunately, there is no real way of getting out of the guarantor agreement. This is because the lender approves a loan based on the guarantor’s credit history, employment status, and other factors involved. The only way out for a guarantor from a loan agreement is when:
- The borrower has paid off the loan in full.
- The guarantor pays off the guarantor loan.
- Your lender declares insolvency, which can ease your repayment burden, if not eradicate it.
- You arrange for a renewed payment plan with your lender, wherein you make smaller payments over a stretched loan term.
- You borrow a new loan to pay off your existing debt. But, beware, because this could pull you into a whirlpool of debt.
The easiest and most sensible way to get out of guarantor obligation is by having the borrower pay off the loan. This way, the loan agreement will simply terminate since the obligations are met. Most guarantors allow premature repayments, even the loan term is long. Although, they may charge you an additional fee for closing the loan.
The fact that there’s no easy way out of a guarantor agreement, is why a borrower and guarantor should be on good terms. There’s a risk involved for everybody in a guarantor loan, which is why it is important to thoroughly grasp the essence of the loan agreement.
Ideally, a guarantor should have a good credit history. The guarantor’s credit history greatly impacts the application. Here is a checklist that the guarantor should fulfill:
- A guarantor should be a legal resident of the UK, with a UK bank account.
- Your guarantor may or may not be a homeowner.
- The guarantor should have a decent credit history.
- Your guarantor should be aged between 21 and 75 years.
- They should have a source of regular income.
Co-signing a guarantor loan is serious business. If a borrower defaults on the loan, it will gravely impact a guarantor’s credit score. Furthermore, the guarantor may face problems getting credit in the future. Thus, both, the borrower and the guarantor must understand the consequences of a default.
In a guarantor loan, if the original borrower fails to repay, then the onus falls on the guarantor. Now, if you, as a guarantor fail to repay the loan, the lender can issue you a CCJ. Not only will this damage your credit score, but it will also hamper your chances of getting a loan in the future.
Therefore, it is important to ensure that proper affordability checks are carried out before you co-sign a loan. You could also keep a copy of the loan agreement with yourself so that you are aware of the borrower’s repayment schedule. You can prompt them right before the repayment date so that they don’t miss it. Go through the loan agreement with a fine-tooth comb.
If you’re willing to, you can be a guarantor as many times as you wish. With that being said, there are some things to take into consideration before you guarantee multiple loans.
- If you simultaneously co-sign two loans as a guarantor, you’re putting your finances in jeopardy with both the agreements. Now, if both borrowers fail to fall through, the onus of both of these defaults will fall on you. This can put a lot of pressure on your finances. So, make a decision about it, keeping the worst-case scenario in mind.
- Let’s suppose you have an existing guarantor obligation and you decide to co-sign another guarantor loan agreement for a relative. Now, when the lender checks their application, they will be able to review your credit profile. They will know that you’re already a guarantor for another loan. In such a case, the lender may feel apprehensive about approving the loan.
The fact that you’re already obliging to a loan agreement, may worry the lender. It would imply that you’re already committed to someone’s debt.
Think about it…
Contemplating why someone would want you to be their guarantor can be helpful. Here’s what you should consider:
- Does the borrower have no credit history of their own?
- Have they started a new job?
- Do they have a stable source of income?
- Why do they have a low credit score?
Whatever the form guarantee may be, assuming that you’re close to the borrower, ask yourself these questions before signing a guarantor loan:
- Why does this person want you to be their guarantor? Is it because of their bad credit history? If so, will they be able to manage repayments?
- Will this person be able to take such a responsibility?
- Why do they need this loan?
- Do they really need a loan or could they simply have saved up?
- Can you afford to pay back this loan if they fail to do so?
- Will becoming their guarantor affect your relationship?
When someone asks you to be a guarantor for their loan, you are vouching for this person on paper. You should advise them to compare loan offers to get the best deal on the table. This way, even if you end up repaying the loan, you are ensuring that you won’t have to pay an extortionate amount.