When someone with a bad credit history or a limited credit history is struggling to get approved by lenders, you can step in and be their guarantor. As a guarantor, you agree to repay the debt in question should the borrower default on their repayments. Some guarantor loan lendersmay require that guarantors provide additional security such as properties they own or other assets that they have title to.
Before you consent to become a guarantor for someone else, you must understand the risks involved in the arrangement. In this way, you will be armed with all the facts you need to make informed decisions.
Who Can Be a Guarantor?
Legally, a guarantor should be someone over 21 years of age. In addition, they should have good credit and prove that they are financially stable. In some cases, the guarantor could be a parent, a sibling, spouse, friend, or anyone who consents to back you up so that you can be approved.
The person you are guaranteeing must be someone you trust and can comfortably take up the repayments if they cannot afford it. Guarantors who are also homeowners are given much weight by lenders because of their home equity.
There are two forms of support that guarantors may provide. The first type of support is security support where the borrower is unable to meet the security requirements for the amount they want to be approved for. In this case, the guarantor offers theirsecurity to assist with the application.
The second form of support is servicing support. Here, the guarantor steps in to assure the lender that in the event the borrower can no longer afford to service the facility, they will take it up and assist with the repayments.
The Risks of Being a Guarantor
When the borrower defaults, the lenders first port of call is to get the borrower to repay. If this fails, the lender will get in touch with the guarantor in an attempt to recover his money. If both processes fail, the facility maybe moved to a debt collector or taken to court for arbitration.
Impact on Your Credit Report
When you guarantee someone, the effect is the same as if you have taken the debt jointly. The only difference is that it won’t show up on your credit file. Having said that, if the borrower defaults, the loan may also be added to your credit report.
However, some lenders run guarantor checks on the people listed as guarantors just to be sure that they are responsible for handling finances. These checks may dent your credit report in the same way they would if you are taking a loan.This may jeopardize your future loan applications.
Impact on Your Future Borrowings
While helping a family member or a friend get approved for a loan is one of the noblest things to do, you need to be careful as this can affect your future credit applications. For instance, if you are a guarantor and you proceed to apply for a mortgage, the mortgage lender may run checks on every aspect of your cashflow.
Any guarantees that you have made on others will appear as a contingent liability and therefore can have a negative impact on your mortgage approval. Remember that lenders are concerned more about your ability to repay the loan than anything else.
Duration of Being a Guarantor
When you are guaranteeing loans such as mortgages that have long repayment periods, you will be given an option to be a guarantor for a section of the loan term. The moment the borrower builds enough equity, they can mortgage the property and get you off the hook as the guarantor.
You could also share the risks of being a guarantor with someone else by splitting your commitments into percentages. For instance, guarantor A may take up 40% and guarantor B take up the rest, 60%.
What If the Guarantor Has Bad Credit?
Ideally, a guarantor should be financially sound. If you have bad credit, chances of being accepted as a guarantor may not as be high as people with good credit. However, some lenders will take chances with you and accept you as a guarantor even with bad credit.
Questions to Ask Yourself Before Becoming a Guarantor
Before you consent to be a guarantor, financial advisors highly recommend that you seek professional advice. This will help you understand the risks, obligations, and impact of being a guarantor. In addition, ask yourself the following questions:
- Does the borrower foresee any life events that can significantly impact their financial circumstances?
- What plans does the borrower have if their financial circumstances change and they cannot service the loan?
- What is the level of my preparedness in case my property has to be sold to repay the loan?
- What is the duration of the guarantee?
- Am I under any sort of pressure whether social or financial to become a guarantor?
- Is the borrower planning to take up more credit?
As you think through the above questions, they will help you assess your fitness to becoming a guarantor.
Being a guarantor is different from being a co-borrower. As a guarantor, you will be held liable for the amounts you have signed against. On the other hand, a co-borrower is someone who borrows jointly with another person, and they repay together. As a guarantor, you have to be very careful and monitor the activities of the borrower to ensure that your interests are safeguarded.
While being a guarantor will cost you nothing, you may have to spend more if the borrower can no longer service their repayments.