If you’ve been asked to be a loan guarantor for a friend or relative you may be wondering whether you are a suitable candidate. Accepting the responsibility of being a guarantor isn’t something to be taken lightly. If the borrower defaults on a payment you will have to cover the repayments and it could affect your credit score as well as theirs.
Here I’ll be looking at guarantor criteria and suitability, why you might want to be a loan guarantor and the things you need to know before you agree to it. First of all, let’s take a quick look at exactly what a guarantor is.
What is a guarantor?
A guarantor is a third party (usually a close friend or family member) who agrees to pay a loan or credit contract if the borrower can’t pay it. Lenders or landlords may ask a person for a guarantor if they are concerned the person may not be able to pay back the loan or keep up with payments on the tenancy or credit agreement (usually because of a poor credit rating). See here for more information on what it means to be a guarantor.
How does being a loan guarantor help my friend or relative?
Being a loan guarantor can help your friend or family member in three ways:
- It can help the person to get a loan if they have a poor credit history
- It can help the person to get a more affordable rate
- If the person successfully pays back the loan, it can help to repair their credit file
What are the criteria for being a loan guarantor?
Requirements for being a guarantor may vary between lenders or landlords. Usually there are certain criteria. To be a loan guarantor:
- You will need to be over the age of 18 (for some lenders you will need to be at least 21)
- You must be resident in the UK
- You need to have a good credit history and be able to prove a sufficient regular income
- You must be financially independent of the borrower
- You will need to have a UK bank account and debit card
In addition, it is worth noting that homeowners are more likely to be accepted as guarantors. However, this isn’t always the case, so if you aren’t a homeowner it doesn’t necessarily mean you can’t be a guarantor if you meet all of the other criteria for certain lenders.
Guarantors are commonly parents helping their children, or a close family member who knows the borrower. Find out more about being the perfect guarantor here.
What should I consider before agreeing to be a guarantor?
The most important considerations for anyone asked to be a guarantor is affordability. Can you afford to repay the loan or cover the repayments if the borrower defaults? Questions you need to ask yourself before agreeing to being a guarantor are:
- Why does this person need a guarantor?
- Can the person afford the monthly repayments?
- Do you trust this person to make the payments on time every month?
- Can you afford to make the payments on this person’s behalf if they can’t pay?
- What would you list as security for guaranteeing the loan (i.e your home)
- Are you willing to risk repossession if the money can’t be paid back?
Can I change my mind?
No. Once you have agreed to be a loan guarantor you can’t change your mind and back out. The only exception to this is if you are still within the cooling off period (usually 14 days after the loan has been agreed). Even then you will be responsible for making sure the borrower gives back the full amount to the lender to cancel the agreement.
Thereafter you are tied in as guarantor until the borrower has completely repaid the loan.
What can I do to protect myself?
Before you agree to be a guarantor it is important to know that if the borrower defaults you will be liable for the repayments. It can also affect your affordability rating with your mortgage lender and could have implications for you should you try to remortgage.
Make sure you read all of the documents carefully and check how the borrower intends to pay back the loan before agreeing to be a guarantor. It is a good idea to put some money aside in case they do miss any payments. Citizens Advice have reported an increase in the number of people hit by shock debts after guaranteeing a loan that the borrower failed to repay.
Ask your friend or relative to let you know straight away if they are having difficulty meeting the repayments, rather than defaulting without your knowledge. It is a good idea to sign an agreement with the borrower to say how they will pay you back if you end up making payments on their behalf.