Guarantor Loans

Since a lending decision depends significantly on the applicant’s credit score, lenders normally seek a guarantee from applicants with a low credit score.

Thus, the guarantor partaking in the loan should have a decent credit history.

Here are some additional prerequisites that a guarantor should fulfil: 

• Your guarantor should be a legal UK resident.
• Ideally, they should have an active bank account in the UK.
• Their credit history should be strong.
• Age should range between 21 and 75.
• You should make sure your guarantor has a steady income. 
• They may or may not be a homeowner. 

Whether you’re becoming a guarantor or involving a friend to guarantee your loan, you need to understand the gravity of the loan’s terms.

Suppose the primary borrower defaults, the debt transfers to you.

Defaulting on the debt can negatively impact your credit score, making it more difficult for you to obtain credit in the future.

Consequently, both guarantors and borrowers need to understand how guarantor loans work.

Having established who can be a guarantor, let us identify those who “cannot” be guarantors.

When choosing a guarantor for your loan, you need to consider a few things. Avoid choosing someone who:

• Is your spouse/partner.
• You share a financial account with. 
• Is aged above 75 years.
• Is A non-UK resident.
• Is unemployed or lacks a source of income.
• Has a below-par credit history or none at all.
• Has received a CCJ or IVA in the past six years.

When you or the guarantor do not settle the debt, there may not be a way out of the guarantor agreement.

Ending a guarantor agreement is possible only when:

• The borrower pays the entire loan. 
• The guarantor settles the whole loan. 
• Your lender declares insolvency, which can ease your repayment burden if not shed it altogether. 
• You and the lender agree to a renewed payment plan, wherein you make smaller payments over a longer tenure. 
• You borrow a new loan to pay off the outstanding. But beware because this could put you into a debt spiral. 

A simple solution to getting out of the guarantor agreement would be to have the borrower pay their dues.

Therefore, the loan agreement will terminate in this way since both parties have fulfilled their obligations.

Even if the loan is long-term, lenders usually allow early repayment of guarantor loans.

You may, however, be charged a fee for early refund. 

The borrower and the guarantor must share a close relationship and fully comprehend their agreement’s implications.  

If you choose to be a guarantor, you can do so as often as you want.

Before guaranteeing multiple loans, you should consider some things.

• When you co-sign two loans as a guarantor simultaneously, you risk your finances on both loans. If both borrowers default, you will be responsible for repaying the loan on their behalf, putting you under a great deal of financial strain. So, decide 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 a lender runs a credit check, they’ll notice that you are associated with two credit applicants as a loan guarantor. In these cases, the lender may be wary of approving the loan.

In the case of a guarantor loan, the burden of repayment falls to the guarantor if the primary borrower fails to repay.

Your lender now has the right to issue you a CCJ if you, as a guarantor, cannot repay the loan.

Not only will this impact your credit score, but it will also impair your ability to get a loan in the future.

You should check the affordability of a loan before co-signing.

In addition, you may want to keep a copy of the loan agreement on hand so that you are aware of the borrower’s repayment schedule.

To ensure they don’t miss the repayment date, you can remind them right before it’s due.

Make sure you carefully read through the agreement.