Who could be my guarantor?
A crucial part to a guarantor loan is selecting a good guarantor to increase your chances of the loan being improved. From the lenders point of view, have a good quality guarantor with a good credit rating adds huge credibility to your application. Even if you have bad credit and have been turned down by banks and other lenders, you can still borrow up to £15,000 based on having a good person as your guarantor. In this article, we explain who is an ideal guarantor and what lenders look for.
Family member, friend or colleague
Your guarantor could be any family member, friend or colleague that is close to you. The guarantor could be your spouse provided that you have separate bank accounts and the one used for the application is not a joint account. They must be fully aware of the loan you are applying for and the role they play if you are unable to meet repayment. Your guarantor must therefore have an insight into your finances and understand the risk involved.
It is worth having a good conversation with the person who you wish to be your guarantor. You should have their full consent before applying for a loan. The guarantor must be aware that if the borrower fails to repay the loan on time, they are responsible to cover the cost of the loan. Therefore, they need to have the repayment amount available each month and if they too cannot meet repayments, they must consider that there may be further charges involved and their credit rating may be affected.
Someone who wants to help you build up your credit rating
The person you use as the guarantor can also be a nice person you know who wants to help you rebuild your credit score and help you get back on your feet. By repaying the guarantor loan on time will benefit your credit score because it shows that you have kept to a repayment schedule and paid on time. The guarantor may be able to lend you the money anyway but through a guarantor loan, they can provide some security for you to rebuild your credit rating for future benefit. Having a better credit score will allow the individual to access other forms of credit and finance in the future more easily and at better rates of interest.
Someone with good credit
Something that is likely to improve the likelihood of you receiving a loan is having a guarantor with good credit. This tells the lender that even if you cannot repay your loan, the guarantor has a very good history of paying other loans and should easily be able to cover the cost. The philosophy behind this is if the person with good credit trusts you, then the lender believes that they can trust you too.
Homeowners are particularly good guarantors to have because they must have demonstrated a good credit rating in order to get a mortgage and they are unlikely to leave the country if they have a property. Being the owner of a car is also a strong indicator because it shows someone who is used to paying monthly instalments which reflects the nature of a guarantor loan.
Who is not a good guarantor to have
Guarantors who are not likely to help get your loan approved including those with bad credit. The lender will not want to have someone with bad credit as the guarantor because they be unlikely to cover the repayment. This means that someone who is bankrupt or has a CCJ or IVA is not going to qualify as your guarantor.
Someone who lives abroad or has lived in the UK for less than 3 years is unlikely to be seen as a good guarantor in the lender’s eyes. This is because the person may be hard to contact and recover funds for in the event of missed repayment.
A fake applicant will not be approved by the lender because they will always run credit checks to understand the creditworthiness of the guarantor.
For a full explanation of what we have discussed here, please enjoy this video below:
What questions you should ask your guarantor
Are they trustworthy?
You need your guarantor to be someone who can be contactable during the loan agreement and will take the application seriously. By asking someone to be your guarantor, there is an element of trust because you are sharing your financial situation with another person.
For this reason, it is best to have someone who you have known well for several years which is why siblings and parents are usually great people to have on board.
For most lenders, once the loan has been funded, it will usually go to the guarantor’s bank account first who can then pass it on to the borrower. The guarantor has a two-week cooling period where they can hold the funds and decide to send it back to the lender within two weeks without charge. But since there are thousands of pounds that potentially enters their account, there is a real trust there to pass it onto the borrower and not abuse this trust position.
Similarly, you need someone reliable so that in case they have to step in during the loan term and make a repayment. You need to find someone that is honest, responsive and will be willing to assist you – and not disappear when things get complex.
2. Will you still be in touch in the future?
With guarantor loans potentially lasting up to 7 years, you need to find a person that you will still be in touch with in the long-term. Although they probably won’t need to be involved, it is good to have someone that you can contact in the future in case the circumstances change.
Imagine using your work colleague as your guarantor or a girlfriend that may not be around for the long run. You may need to contact them 5 years later for assistance, but this could be quite awkward. Plus, once you are in an agreement, you cannot stop being someone’s guarantor because a lot of the terms are based on yours and their affordability. Even if you die, the lender may call upon the next of kin or have part ownership of the estate. See our guide on can I stop being a guarantor.
Once again, your best bet is to select a family member because you are more likely to be in touch in the future.
3. Do they have disposable income?
Sure, having a good credit score and being a homeowner can make you an ideal guarantor. But what about disposable income? Someone can have a nice home, good job and good credit history but they may have huge expenses due to having children or recently moving home.
So despite things looking rosy, they may have very little savings and actually struggle to help you make repayments if need be. In fact, having to pay off your guarantor loan could put them into further debt and could put you both in a very difficult situation. Not only should you be honest with your guarantor about your finances, but they need to be honest about theirs and understanding that realistically they may have to pay a certain amount each year if you cannot.
In the worse case scenario, if you guarantor is a homeowner, they can potentially sell their home, remortgage or rent out rooms to generate income. But again, you don’t want to put someone in this situation, especially a close friend or family member – so please consider their financial position before.
4. Will their financial situation change?
When choosing your guarantor, do you know if they financial situation is going to charge during the loan term of 3, 5 or 7 years? For instance, do you know if the guarantor you choose is planning on retiring soon? Will having to make a payment for you in the future put strain on their finances? You could be better having someone younger in their career and their income is likely to increase significantly over the next few years instead.
Is your guarantor a family man? Do you see them moving into a home and having children in the next year or two, as this will also impact their expenditure and make it less likely to offer you assistance for your loan.
Even having a guarantor that lives partially abroad or plans to move abroad will make it harder to get in touch with them in the future. There is also the lender who may need to be in touch with them too. You ideally want someone who lives near you and who you see regularly, so that you can always contact them if need be.
At the end of the day, being a guarantor can be quite a responsibility and make you obligated to pay thousands of pounds. However, finding just the right relationship and appropriate person to be your guarantor can make it a positive experience for everyone involved. Plus, they can genuinely help the borrower get into the routine of repaying on time and this can ultimately help their improve their credit rating and obtain lower cost credit in the future.