What are the implications of being a guarantor for a loan?
Being a guarantor will help someone to get an affordable loan.
Never an agreement that should be entered into lightly, fully establishing your what may be expected is crucial.
Bringing responsibilities and risks – we cover what you need to know.
When agreeing to be a guarantor on a loan you are entering into a binding legal contract with responsibilities. Therefore before you agree to do this, it is important to ensure that you understand all the implications.
The reason why a guarantor loan is the most affordable type of bad credit loan is that the lender is looking to the guarantor for security, and they will only lend to people who have guarantors with an income and a clean credit rating (or at worst only slightly imperfect).
Ultimately if the borrower stops paying the lender will look to you as guarantor to make the repayments.
We look at all the potential implications on you becoming a guarantor, right the way down to the highly unlikely doomsday scenario of bankruptcy due to continued non-payment. We raise these issues not because they are likely to happen, but feel that if you are armed with all the information then you can go into the commitment with your eyes open.
1. Credit Search
When going through the application process the lender will do a search on your credit history, just as any lender would if you were making a loan application yourself.
Your credit history dates back six years so they will be looking for any missed payments, defaults or CCJ’s. A credit search will also take into account whether or not you are on the local electoral register, plus if you have any other relevant financial associations.
So when the lender does the credit search this will show up on your credit file. This generally is not a problem unless you do something extreme such as making ten applications for a loan and there are ten credit searches showing in quick succession, lenders do not like seeing this, as it implies that you have had ten rejections.
So the first implication on you is the credit search showing up on your file, and be mindful therefore that the person who has asked you to be their guarantor does not make lots of applications in quick succession, for having a number of searches on your credit file will actually reduce your chance of being accepted as a guarantor, and therefore their chance of being accepted.
2. Making the loan payments
By agreeing to be a guarantor you are making yourself legally liable to make the loan repayments if the borrower defaults.
So if the borrower does not pay, you will be required to make the loan repayments even though you have not enjoyed the benefit of the loan money.
If you do not make these loan repayments, you are subject to the same implications as if you had defaulted on an unsecured loan that you had taken out yourself.
3. Fees and charges from the lender
When the borrower, or yourself, miss payments some of our lenders may charge fees as a penalty and this will obviously increase the debt that needs to be paid back and the overall burden on the borrower and you.
Fees and charges vary from lender to lender. Make sure you find out the exact rates before the loan is taken out so you are aware of additional expenditure.
4. Damaged credit file
If payments are missed, these will show up on your credit file.
Even one missed payment reduces your credit score and could impede your ability to obtain future credit, although the more payments that are missed the greater the impact.
5. County Court Judgement (CCJ)
Depending on your lender, after a certain number of missed payments they may apply for a CCJ for both you and the borrower.
This is where you attend Court and if the Judge agrees that you rightfully owe the money, they will order it to be paid.
If this money is paid within a month of the order the CCJ does not appear on your credit file, but if the amount is not paid, the CCJ will show for the next six years severely affecting your opportunity to get credit (even a mobile phone contract)!
If affordability is the issue, then the Judge may propose a payment plan, though the CCJ will still show up on your file.
If any payments ordered by the CCJ are not met, it is possible the lender may apply for bankruptcy. This is not common but is more likely for larger loans.
The reason this is unlikely is that usually with bankruptcy cases the insolvency practitioner who undertakes the work has high fees so the lender does not end up getting much of their money back. For this reason they often do not bother on smaller value loans but you cannot bank on this!
So while the possibility of you being made bankrupt is highly unlikely, you should understand that this is the very worst case.
7. Damaged relationships
Often overlooked is the damage to the relationship between you and the borrower if all goes wrong. If this is a close friend or family member this is maybe something far greater that is lost than money!
It doesn’t have to be that bad!
If you have read this far you are probably thinking that there is no way that you are going to become a guarantor!
The doomsday scenarios are only based on the borrower and you not making the loan repayments.
If the borrower makes their repayments, then these scenarios will never happen.
So a key part of the process is for you to make sure that the borrower:
- Only borrows the amount of money they need – i.e. if they need £1,000 they only borrow £1,000 and not £2,000
- Can comfortably afford the repayments – we would do this by using our loan calculator to estimate the repayments, plus use the Citizens Advice Bureau’s Budget Sheet to map out their income and expenditure.
Finally, we would recommend that you reassure yourself that you could afford the monthly repayments if the borrower could not pay. If you cannot, we would suggest that you do not become a guarantor.
If you can, however, you could be really helping someone out, enabling then to get them the credit they may desperately need.