Guarantor loans are one way to help someone borrow money if they’re struggling to borrow money on their own. Poor credit history may affect your ability to borrow a personal loan. However, there are risks involved for both the guarantor and the borrower when they enter into an agreement.
Who can be a loan guarantor?
Almost anyone can act as your guarantor. They can be a family member, a friend or a co-worker. They will have to be at least 21 years old and have a good credit history. A loan guarantor must have a stable source of income as if the borrower fails to repay, the guarantor has to take the lead. They need to repay the debt if the borrower fails to do.
If you are considering to ask someone to become a guarantor, or someone you trust has asked you to become their guarantor – think twice. Assess the financial situation and loan repayment affordability before you enter into any legality.
Who cannot be a guarantor?
Now that you already know who can be a guarantor, let us understand who “cannot” be a guarantor. There are a few things you have to consider while choosing a guarantor for your loan. Ensure that you do not choose a person who:
- Is your partner/wife/husband
- Shares a financial account with you
- Is over 75 years of age
- Not a resident of the UK
- Doesn’t have an employment or source of income
- Have a poor credit history or no history at all
- Has received a CCJ or IVA in the last 6 years
Does a loan guarantor have to be a homeowner?
It depends on the lender and the loan amount that you’re about to borrow. Your guarantor would need to have a good credit score. They must be able to afford the repayments. A guarantor doesn’t need to be a homeowner. They may be living on rent or sharing a place to stay with their partner. However, if your guarantor possesses a home of their own, you may get better interest rates for the loan. This is because the risk involved for the lender is comparatively lower.
Does being a guarantor affect your credit score?
Your credit report may be impaired if the borrower can no longer keep up with the repayment of the loan. The guarantor has to continue the repayment on behalf of the applicant. Being responsible for the repayment of the loan may have an impact on your credit score.
If you keep up with the repayments, your credit score will not be affected. Rather it will improve when you make all the remaining repayments on time and in full. But if you struggle to keep up with the repayments, it will damage your score. Hence, before accepting someone’s request to become a guarantor for them, you must assess your financial capabilities. Understand the Terms & Conditions of the loan and the responsibilities that you will have as a guarantor.
The lender may carry out a credit search to assess your profile as a guarantor. That search may remain on your profile for 12 months. It can improve if you keep making regular repayments of your debts.
What happens if a guarantor fails to repay a loan?
A guarantor is only required to pay after the borrower defaults on a loan. If the guarantor also fails to repay the loan, it will:
- Damage their credit record
- Lead to legal consequences
- Result in the repossession of their home/assets
Applying for a guarantor loan is a big financial commitment. You should evaluate your financial situations thoroughly before taking any such decisions. Read all the documents carefully before you sign on the dotted line.