How can being a guarantor affect my credit rating?
Written by Robert Bester, Consumer Finance Expert Robert has been a writer for six years, specialising in consumer finance and the UK lending market. Concentrating on consumer credit products, Robert writes informative articles that help customers manage their personal finances efficiently.
30th November 2020
3 minute read
Have you been thinking about becoming a guarantor for a loan? You would usually become a guarantor if a close friend or family member would like to borrow money but can’t because of their bad credit rating. If you have a good credit rating you can act as a guarantor, allowing them to borrow money as per usual.
This might be something you’ve already discussed with a friend or family member keen on borrowing, or it might be an option you’re just starting to explore. Either way, we’ve put together all the relevant information you need to know if you’re thinking of becoming a guarantor.
What does it mean to be a guarantor?
- Help a family member or friend borrow money
- You will need a good credit rating
- You will be liable to pay back the money if the borrower fails to do so
Being a guarantor for someone means that you are offering to make repayments on someone else’s behalf, if they are unable to. This is usually on the basis that you have a good credit rating and are accepted by a lender as a guarantor.
In the case of a guarantor loan, a lender will expect monthly repayments from the main borrower, but if they fail to pay, they will expect the guarantor to step in and pay on the borrower’s behalf. You are therefore acting as a ‘guarantee’ that the repayment will be met.
Since you will be taking on a certain risk yourself, you should know the borrower well and trust that they will be able to pay back the loan themselves. Usually they will be a close friend or family member who you are helping if they have been rejected due to their bad credit score.
Find out if you qualify as a guarantor for a loan here.
Does being a guarantor effect my credit rating?
Simply becoming a guarantor for someone shouldn’t have an effect on your credit rating, as long as the main borrower manages to successfully make all the required repayments on time and in full.
However, if they fail to keep up with repayments and you have to step in, this can put your credit score at risk. If you are able to continue the repayments, or pay off the loan completely your credit score should stay the same or even slightly improve. However, if you also have trouble keeping up with repayments, this can damage your credit score and reduce it over time.
Will being a guarantor affect me getting a mortgage?
Being a guarantor shouldn’t affect your ability to get a mortgage, unless you’re then called upon to make repayments. Since you would be inheriting the debt, this will put you at risk of not being able to repay and this can ultimately decrease your credit score if you don’t keep up with repayments yourself.
Whilst this is a risk, if the borrower is able to repay the entire loan, or you are able to inherit the debt and repay it yourself, this shouldn’t have any negative impact on your credit score. This will mean your chances of being accepted for a mortgage would remain unaffected.
Can a guarantor loan be written off?
Whilst a personal loan can be written off if you declare bankruptcy, a guarantor loan is not as simple as that as two people are involved; the borrower and the guarantor.
If the borrower declares bankruptcy then they will be exempt from having to pay the loan, but the guarantor will then be liable to pay it instead. On the other hand, if the guarantor declares bankruptcy the borrower is then under pressure to keep up with their repayments.
There may be complications if the borrower fails to make payments as the lender will then approach the guarantor who will be unable to pay due to bankruptcy.
What are the positive effects of being a guarantor?
Apart from helping out a close friend or family member, the only positive effects of being a guarantor are potentially to improve your credit score slightly.
However, this will only occur if the guarantor has to start repaying the loan themselves. Every successful repayment will have a positive impact on your credit score and you will notice a slight increase every month as long as you aren’t failing to repay any loans or credit cards of your own.
If the borrower is successfully repaying the loan, then there should be a positive impact on their credit score, but there won’t be any positive effects for the guarantor.
Start comparing guarantor loans
If you are happy being a guarantor for a close friend or family member, why not get started? You can try our moneymatcher eligibility tool to narrow down your search but make sure you get the borrower to fill in their details as it will be in their name.
Alternatively, start looking through guarantor loans using the link below. Good luck!