Using & Being a Guarantor
- Finding the right guarantor for your lender
- What it means to be a guarantor
- Answers to questions you may have
The idea of a using a guarantor for a loan or being a guarantor for someone else may be new to you. But don't worry - we have lots of information for you so you can quickly understand what a guarantor is, how to find one, and what a guarantor's responsibilities are.
If you have had previous credit problems a lender might consider lending you money to be risky. However, if you can get someone to guarantee to step in to make your repayments if you suddenly were unable to then this will alleviate the risk to the lender. This person is your guarantor.
These are the typical requirements with each lender being slightly different:
Lenders used to prefer guarantors to be homeowners, but with the increase of lender competition this is no longer the case - non-homeowners are just as acceptable. Where there is a difference is in the maximum loan amount and interest rate charged:
The counterpoint to this is that it is often easier to find a non-homeowner to be a guarantor.
If a borrower misses a monthly payment then this is the point where the lender will ask the guarantor to step in and make the payment instead. With this in mind it is important for the lender to know that any guarantor has the financial capability to do it. As part of the application process the guarantor will need to prove their income is sufficient and a loan repayment affordable. Also they need to show they are creditworthy and don't have financial problems of their own.
Financial independence means that the borrower and guarantor have their own income streams and their own bank accounts and can make financial decisions without reference to the other. So it is perfectly possible for a guarantor and borrower to be married, or to be in relationship and living in the same home as each other. Both parties need to be able to show they could separately afford the loan repayments.
Not only do you need to be aware of lender requirements but you should:
It may be completely obvious to you who your guarantor is going to be. But in many cases it won't be. Your social network may be wider than you think especially when you include family, friends and possibly work colleagues too.
Drawing up a short list of options would be a good idea. Ask yourself:
And then rank your short list in terms of order of preference. Which of your short list are likely to be your best bet?
Now you need to think about how you approach them. How you go about this may be simply down to your personality, but you ought to think about how you're going to pitch the request. Any potential guarantor is likely to have a long list of questions and you need to be able to answer them, or at least point them to our website to help do this. But is certainly very important that anyone who is considering being your guarantor understands their obligations and feels they can trust you. After all you don't want to damage friendships.
The benefit of providing a guarantor is that the borrower can obtain unsecured credit on reasonable terms even though they may have a poor credit history. This is possible because the presence of a guarantor offsets any risk that the lender would otherwise face. With this in mind these are the obligations and responsibilities of the guarantor:
Clearly if you have been asked to act for someone as a guarantor you should not do so unless you are willing to follow through on these responsibilities.
First you need to meet the basic requirements. Second you need to be comfortable that you will be credit checked. Third you need to satisfy yourself that you know the borrower well enough that you can trust them to make the loan repayments. How would you react if you were required to step in and make a payment on behalf of the borrower? What might it do to the way you feel about your friendship? Would it impact on your lifestyle?
The first thing to decide is if you are happy to act as the guarantor for the person who has asked you:
If you are comfortable to act as their guarantor then the applicant will tell you how to provide your details to the lender. This is likely to require you to log in to the lender's website and use a reference provided by the applicant. Don't forget that the lender will want to credit check you too. They need to be confident that should the borrower fail to make a loan repayment that you can afford to.
A lender needs to ensure that a guarantor has the capacity to make the loan repayments if the borrower cannot. So, they will conduct a credit check to ensure that you:
This type of credit check is called a Quotation search or a "soft" search. This type of search is visible on your credit report but it does not impact your credit score.
Because the guarantor might be required to make one or more payments if the borrower fails to they need to be creditworthy on their own terms. So, any guarantor needs to have a good credit rating.
You will be credit checked prior to the approval of the loan for the borrower. This is a "soft" search that does not leave an imprint on your credit file so does not affect your score. If the borrower can't make a repayment and you have to do it on their behalf then this will not affect your score, unless of course you have difficulty making the payment too.
While any guarantor needs to have an income the income could be from a pension; you don't have to be employed. So being retired is OK so long as any upper age limit at the start of the loan period is not exceeded. This is often the age of 75.
The primary risk to you if you act as as a guarantor is that the borrower fails to keep up the repayments. In these situations the lender has a right to require the you to step in to make the payment. In the worst case the lender may require you to repay the balance of the loan outstanding. If you are unwilling to do this then it will affect your credit rating and the lender could ultimately start legal proceedings against you and the borrower.
So you should only volunteer to act as someone's guarantor if you would otherwise be prepared to risk you own money. You must be able to trust the borrower.
You can change your mind about being someone's guarantor at any point until you have signed the agreement. From that moment on you are obliged to continue. You cannot pass the responsibility on to anyone else. So, do take time to consider any request to act as a guarantor and only agree to it if you are certain it is the right thing to do.
We get some very specific questions about what defines an ideal guarantor - here are some of them and the answers we gave:
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