The responsibility of the guarantor
What does guarantor mean on a loan?
The guarantor is the person who agrees to pay for someone else’s loan if that person cannot afford to repay. The guarantor is always asked to co-sign the loan agreement before it goes through and the lenders we feature will usually do a phone call with both parties to go over the terms and conditions of the agreement.
Circumstances can change and the borrower may not be able to meet repayment on the dates specified. If this is the case, the lender will always contact the borrower directly if they are having difficulty repaying and they will try offer some kind of pay plan or arrangement. But if the customer cannot repay at all or come to some kind of arrangement, the repayment due will automatically be collected by the lender from the guarantor’s debit account. Its important that the person who guarantees the loan fully understands the role of the guarantor and their responsibilities involved in the transaction.
What does being a guarantor involve?
- Co-signing the loan agreement during the application process. This is all done electronically and only takes a few minutes.
- Having a credit check run to prove that you can successfully back up the loan.
- Receiving the funds if successful and then passing them onto the borrower. You have a two-week cooling period to change your mind.
- Most importantly, covering any repayments if the main borrower misses any.
To make repayment if the borrower defaults
The guarantor has a financial obligation to make the monthly repayments for the guarantor loan if the borrower defaults. Therefore, they need to have the money available each month in their debit account as a back up to avoid the account from going into arrears and further late fees and charges being added. Even if the borrower goes bankrupt or IVA, the guarantor is still responsible to pay for the loan on their behalf. Sometimes there are emergencies that occur or people can get paid late from their employer so this is something that the guarantor must be aware of.
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If the payment does not go through for neither the borrower or the guarantor, the lender automatically reports the information to the main credit reference agencies (CallCredit, Experian and Equifax) saying that they were unable to meet repayment. This will negatively impact the credit score of both parties and make it harder to access other loans in the future. Usually the guarantor has a history of good credit which they have achieved over time by paying off loans and credit cards. It is important to know that their strong credit rating may be at risk if they do not have sufficient funds to successfully cover the loan of the borrower.
Things to consider before agreeing to be the guarantor
It is advised that the borrower and the guarantor have a close relationship before going ahead with the loan. The guarantor needs to understand the borrower’s financial position and their reasons for the guarantor loan as discussed below:
If the borrower has bad credit and wants to use the guarantor loan to boost their credit score, this is up to the guarantor to decide how likely it is that the person will be able to repay. If they know the person well and feel very confident that they will repay, then it will be very low risk and they will be helping out their friend demonstrate their creditworthiness and improve their credit rating. This will make it easier for the borrower to obtain other credit and loans in the future without the need of a guarantor.
If the borrower needs a guarantor loan for an expense or special purchase, the guarantor has to consider how important it is that they require the loan. If they need the loan for a non-urgent purchase like jewellery or a new car, the guarantor needs to think whether the borrower should be trying to save up for something like this rather than taking on debt and getting a guarantor involved. By comparison, something like a holiday which gets more expensive the longer you wait to book or a funeral which needs to be paid for immediately, it may be easier to access funds through a guarantor loan rather than wait a long time to save up.
By agreeing to be a guarantor, one should consider whether the borrower can use alternatives. If that borrower belongs to a credit union, they can save significant amounts on the interest by applying for finance from a credit union. Other ways to obtain low-cost finance include being eligible for a 0% credit card where you pay no fees provided that you can repay what you have borrowed each month on time. Simple ways to get money is if the borrower has a lot of unwanted items around the house like CDs, clothes or jewellery, they may be able to get the money they need by selling their things on Ebay or at a local car boot sale.
The most important thing to consider as a guarantor is if the borrower defaults on the repayment and you are obligated to pay for them, will they indeed pay you back afterwards? As a guarantor you need to think that you may be without a few hundred pounds if you are required to cover the cost of the loan and you must contemplate whether you will get the money back from the borrower and whether it will jeopardise the friendship. Some people get very sensitive when it comes to money and retrieving money from close friends and family can sometimes prove difficult. Ways to consider if the person will repay you is whether they have a secure job and a steady flow of income, whether you have lent them money before and of course, if they are trustworthy. There is a financial commitment to being a guarantor and it is essential to understand the risks beforehand.