18 November 2019
What does the role of “Guarantor” mean, exactly? If you’re thinking about becoming a guarantor on someone’s behalf for a loan application, or indeed asking someone to be a guarantor on your behalf, this blog will help to explain who can be one, how you become one; what to expect, and more.
A Guarantor Loan, is a loan that’s usually taken out by people in circumstances where a trusted individual (such as a family member or close friend) “guarantees” to honour the outstanding debt if the borrower defaults on future repayments.
With a guarantor, you are basically able to give an assurance to your provider of credit that they will get their money back even if you happen to struggle to meet the necessary repayments yourself, as your guarantor can step in to pay when and if you are unable to.
Being a Guarantor: What does it Mean?
As previously mentioned, the principle role of a guarantor is to promise to repay the debt on behalf of a borrower if they are unable to. The motive behind being a guarantor is to help someone else to get credit, such as a mortgage or a personal loan, in situations where their credit profile might not be in a good enough condition to get these types of credit on their own merits .
Since this is a strong and legally binding commitment to make, you of course should only agree to be a guarantor on behalf of someone that you know well and trust; a common example of a guarantor would be a parent acting as the guarantor for their children as they make their first steps onto the property ladder, with the parent(s) acting as a guarantor against a first-time mortgage loan application.
Who can be a Guarantor?
To be a guarantor for someone applying for credit, there are several factors that go into making a solid and more-likely to be accepted guarantor application.
There are a few musts, such as; you must be over 21 years old, financially stable and have a good personal credit history. Your case will be far stronger, however, if you’re a homeowner and have an excellent credit history, as these factors are considered to be strong evidence that you should, in theory, be a reliable guarantor.
Why would I be needed to act as a Guarantor?
There are several reasons why you might be needed as a guarantor for someone when they are applying for credit, some of these include;
- The applicant might have a low credit score, preventing them from being approved for important credit products like a mortgage (you can learn more about the factors that affect your credit score here).
- They may be a borrower with no little or no credit history whatsoever.
You should also self-assess if you are asked to be a guarantor for somebody else; and ask yourself some important questions, such as;
- Are you definitely in a strong enough financial position to be their guarantor?
- Can you afford to make the full loan repayments on time if the named borrower cannot?
- And even if you can financially afford the full cost of the credit, perhaps these repayments might affect your relationship with this named borrower?
At Buffa we are always concerned about the effect personal finance and debt can have on mental health and personal relationships; you can see all of our articles relating to this area in our Debt Advice pages.
What is the cost of being a Guarantor?
Being a guarantor obviously presents some risk of costing you (the guarantor) money; by its nature you’re offering to cover repayments for someone else’s credit agreement. You might even be at further risk if you yourself are unable to meet the necessary repayments, with the worst-case scenario being you having an asset of your own repossessed if the credit agreement itself is a secured form of debt.
This is why it is vital to properly assess your own financial situation as well as the borrowers before agreeing to enter into an arrangement where you are the named guarantor. If you need any help when assessing your own your own financial situation you can see our Guide to Budgeting here.
When it comes to the cost of a being a guarantor, in the case of a guarantor backed mortgage you don’t necessarily need to remain as the guarantor for the whole term of the mortgage agreement. You can be removed as guarantor once the borrower has built up enough equity after they remortgage.
However, you cannot simply “get out” of being a guarantor for any form of credit; once you’ve signed the necessary credit agreement paperwork you are considered to be equally liable for the ongoing repayments of the debt as the named borrower themselves and as such this is not a decision to be taken lightly at all.
Will being a Guarantor affect my Finances?
Providing the named borrower keeps up with their repayments, you shouldn’t encounter any direct impact on things like your credit score or of course your available funds . However, should the borrower begin to fail to make their payments and the credit agreement falls into default because you also are unable to make the necessary repayments, details of this default will also be added to your credit report.
Helping a family member or close friend to secure their credit can also affect your own future mortgage applications. Mortgage lenders look at every aspect of your income and outgoings, including debts; because as a guarantor you may have to pay your friend/family member’s debt, and this type of borrowing can have a negative impact when they calculate accumulated debts for affordability. Hence, you may find it stops you getting another mortgage in your own right in the future.