Applying for a loan is usually straightforward if you have a good credit rating. However, if you’ve had issues with financial products in the past and have a poor credit rating, you might have to resort to another option, such as getting a guarantor loan.
One aspect of getting this type of loan is that you will need to find someone who is willing to be a guarantor and therefore become liable for the loan if there are any issues with repayment.
Whether you are looking for a guarantor loan yourself, or you are thinking of becoming a guarantor for someone else, we have put together everything you need to know below.
Who can be a guarantor?
- They need to have a good credit rating
- They are considered trustworthy by the lender
- They have a personal relationship with the borrower
- They sometimes need to be a homeowner (depending on the loan agreement)
- They need to be able to afford repayments if the borrower fails to make them
To be a guarantor you usually have a to have a good credit score, first and foremost, since you’re the one who will be credit checked by the lender.
You will also have to know the borrower personally and be willing to voluntarily become liable for the loan if it is not repaid. For example, if your son or daughter would like to borrow money but has a poor credit score or thin credit file, you as the parent could step in as guarantor.
What does a guarantor have to do?
- Have a good credit rating and be eligible for a guarantor loan
- Voluntarily link themselves to the loan agreement by providing personal details
- If the loan is not repaid, they become liable to pay the remaining amount
A guarantor is usually a family member or close friend who has agreed to help out someone who would like to borrow money. The arrangement usually comes about because the borrower has a poor credit score and would be rejected for any loan application they made on their own.
Therefore, a guarantor will link themselves with the loan agreement. They use their own good credit rating to be accepted for the loan and the borrower will then receive the agreed funds and start repaying on a monthly basis. The guarantor will only have to step in if the borrower fails to make repayments. The debt will then pass to the guarantor.
Why is a guarantor necessary?
Having a guarantor arrangement becomes necessary when a lender is unable to trust a borrower on their own merits. It might be that they’ve been declared bankrupt in the past, had a CCJ or have just had issues repaying credit cards or loans.
By nominating a guarantor, it’s almost like putting up collateral in case the borrower has any further issues with their finances. The bank will then turn to the guarantor and ask them to make repayments instead.
What are the risks of being a guarantor?
The main risk of being a guarantor is the borrower being unable to repay the loan. This means you will have to take over responsibility and pay it yourself. Taking on these repayments like anyone else borrowing money always comes with a risk, so you need to make sure that you are able to do so if required.
The ultimate risk of course, is that you as the guarantor are unable to repay the loan as well, which will negatively impact your credit score and build up further debt through fees and charges added on. It can also lead to a CCJ or bankruptcy if you have no way to repay the loan.
How do I protect myself as a guarantor?
The best way to protect yourself as a guarantor is to use the following tips:
- Understand the loan agreement you’re entering into, as well as any fees or charges
- Only agree to being a guarantor if you believe the borrower can comfortably make repayments
- Keep checking in with the borrower to make sure repayments are being made
- If the borrower is struggling, start saving money just in case you need to chip in. If the borrower is able to keep up with repayments, you have then got savings you can use elsewhere at a later date
Start comparing guarantor loans
If you’re happy to proceed as a guarantor, or you know someone who could be a guarantor for you, start browsing through our available loans. You can even use our moneymatcher tool to start narrowing down your options, just by entering a few personal details.