Most people are generally aware that taking a loan is an important decision, and one that should not be taken lightly. Interestingly enough, the subject of guarantorship seems to be much less clear and tends to be treated with a lot less importance. This can lead to many misconceptions, poor decisions, and debt.
Guarantor loans are not bad in and of themselves. In fact, they are useful financial tools that allow people with a poor credit history and/or lower income to get access to credit. Their wide availability is a relatively new phenomenon, and, although their conditions are usually less than ideal, their interest rates tend to be lower than that of short-term loans and payday loans.
What’s important about guarantor loans is that all of the involved parties know what they’re signing up for. Since the consequences of defaulting on a guarantor loan can be quite severe, it also is in the guarantor’s best interest to keep a close eye on the proceedings and consult good insolvency practitioners (UK-specific) to protect oneself at the first whiff of trouble.
What is a Guarantor Loan?
A guarantor loan is a specific kind of loan that allows a borrower with a sub-optimal credit score to still get a loan. These loans are made based on the agreement of a guarantor that if the main borrower fails to fulfill their obligation to the lender, the guarantor becomes liable for that debt.
What is the role of a Guarantor?
A guarantor on a loan is someone who voluntarily agrees to guarantee the repayment of either the entirety or a portion of a loan if the borrower fails to do so.
Usually, the guarantor pledges the entirety of the assets as collateral for the borrower’s debt. In some cases, a guarantor may be responsible for just a part of that debt, or lenders may require specific assets to be listed by the guarantor in case they need to be repossessed to pay for the debt.
Keep in mind that, while anyone can ask you to be a guarantor for their loan, you are in no way obligated to accept.
Who Can Become A Loan Guarantor?
Due to the fact that becoming a guarantor is considered a financial risk, UK law stipulates that in order to become a guarantor, one must be 21 years of age.
Companies that offer guarantor loans invariably have their own rules and preferences on who should or should not be a guarantor. Although the details may vary from one company to another, the general rule is that you can only be accepted as a guarantor if you yourself have a
good credit score and are financially stable. Most lenders would require solid evidence that you can pay back the loan if the main borrower becomes insolvent.
This is why homeowners and full-time employees with high wages are the preferred types of loan guarantors.
Naturally, sharing all of your financial accounts and assets with the main borrower disqualifies you from becoming a guarantor for their loans.
Is it Possible to Stop Being a Guarantor for a Loan? The simple answer to that question is a resounding “no.”
There can be ways to back out of becoming a guarantor in the first place before the deal is finalized. Some lenders may allow guarantors to “back out” of the loan before it is finalized, which effectively nullifies the loan.
However, once the paperwork agreeing to be a guarantor for a loan is signed and the loan is finalized, you can’t get out of being a guarantor for that particular loan until the debt is paid.
Does Being a Guarantor Affect Your Credit Score?
The good news is that the mere act of taking on the role of guarantor does not affect your credit file. Further, being a guarantor of a diligent borrower that pays their debt on time will not affect your credit file in any way. That being said, many lenders take your status as a guarantor under consideration when you apply for a loan yourself.
Things can start getting bad for a guarantor if the main borrower defaults on the debt. In that case, not only will the loan be added to your credit record, but said credit record would suffer as if you yourself had defaulted on that debt.
How To Protect Yourself From Problems as a Guarantor?
The easiest way to avoid guarantor debt is to not become a guarantor to unreliable borrowers.
You should only ever agree to become a guarantor to people you completely trust if you are absolutely sure that they will be able to make timely payments on the loan. Doing anything else puts you at risk of becoming insolvent yourself.
Additionally, it may be a good idea to only agree to become a guarantor if the main borrower is fit and healthy. If they fall ill for an extended period of time they can end up defaulting on their
debt, and if they happen to pass away they are considered to have automatically defaulted on their debt.
Always remember that you are under no actual legal obligation to take on another person’s debts. It is a terrible idea to do so unless you are sure that this step is absolutely necessary. Don’t let yourself be peer-pressured, shamed, or otherwise convinced to take on debt that you think may turn bad against your better judgement.
If someone does convince you to take the role of guarantor for their loan, read the paperwork carefully and don’t sign the contract if you find any objectionable clauses.
If you are already a guarantor or plan on becoming one in the near future, it may be a good idea to have some spare cash on hand if you suddenly find yourself having to pick up the slack. This may save your assets from being repossessed if the main borrower defaults on the debt.