A guarantor loan is an unsecured loan, generally taken out by someone who has a poor credit rating or no credit history. They need a person with good credit to co-sign their application. This person is known as a guarantor and becomes responsible for payments if the borrower cannot meet their obligations.
Typically, a guarantor loan will be between £1,000 and £15,000, repayable between one and five years. However, more and more landlords and mortgage lenders are asking for guarantors before approving applications; this might include students wanting to rent when they go to university or first time home buyers who have a small deposit and require a guarantor mortgage.
Once you have agreed to be a guarantor, you cannot remove your name from any loan agreement until it is paid off. If you are a guarantor on a mortgage, your name can be removed once enough equity has been built up in the home or if the borrower remortgages.
Who can be a guarantor?
Anyone can be a guarantor; though, typically, it tends to be parents or family members of the borrower. This is because being a guarantor requires them to trust the borrower and be willing to cover repayments if needed. A guarantor must be over 21, have a good credit score and a regular source of income; most lenders require guarantors to be homeowners. Many lenders require that the guarantor is a homeowner, however there are some lenders who provide non homeowner guarantor loans that are a little more expensive, but could be an option if you are a tenant or co-living with friends or family.
A spouse will normally not be accepted as a guarantor unless they have a separate bank account.
Questions a guarantor should ask themselves
If you are asked by a friend or family member to co-sign a loan or other credit agreement before you agree, you need to consider:
- The reasons behind the request, e.g. if they have a bad credit history is this because they can’t repay their debts, and if they can’t why do they think they can make loan repayments?
- Do you trust them to meet their repayment obligations?
- Do they really need the loan or to take out credit?
- If they don’t make the repayments, can you afford to?
- How would non-repayment of the debt impact your relationship?
- If you agree to act as a guarantor, will your home or property be at risk?
- Can you be involved in the decision about what loan to apply for, e.g. you might be able to find one with better terms?
If you are acting as a guarantor for a rental property, you also need to consider if the person is responsible enough to maintain the property otherwise you could be liable for any damage they do to it as well as rent arrears.
A guarantor’s credit rating
As long as the borrower makes repayments on time, nothing will show up on your credit report, and your score won’t be affected. However, if the borrower doesn’t make repayments, then the debt will move to your credit report, and you will need to keep making payments if you don’t want your score to be negatively affected.
While being a guarantor won’t affect your credit score, it could impact your ability to get a mortgage as lenders look at your finances in the round and may consider any potential repayments if the borrower defaults against your outgoings.
Limiting liability
When you agree to be a guarantor, you might not only be liable for covering repayments. Loan agreements can come with obligations on the borrower, obligations which may fall to you if they fail to repay their loan. These could include car or mortgage payments, personal loans, and credit card debts.
To mitigate against this risk, you can ask for a limited guarantee, which limits your liabilities – the amount you will need to repay if the borrower defaults.
Documentation
A borrower’s obligations will be included in any loan paperwork. Make sure you ask for a copy of this, and review it carefully, before committing to becoming a guarantor. Any documentation you receive should include a repayment schedule, the loan agreement, interest rates and any fees for late payment.
Once the loan has been approved, the lender should send you final documentation within fifteen days. They must also tell you about any changes to the contract within five working days, e.g. any increase in a borrower’s debt or a reduction in the payment period due to overpayment. The lender should also send you any other notices they send the borrower. This includes letters relating to late or missed payments and any repossession notices.
If the lender doesn’t send you copies of repossession notices, you might be able to reduce your liability by applying to the court. You can also apply to the court to have the contract changed if you feel it is oppressive.
Written agreement
As well as an agreement with the lender, you should agree written terms with the borrower. This should include the borrower letting you know if they are at risk of missing a payment, if they have missed a payment, and outline each person’s responsibility when it comes to paying back the loan.
Agreements don’t need to be complicated but if you are unsure about what to include, speak to your local Citizens Advice or get legal advice, this way you and the borrower are protected.
Alternatives
There are alternatives to guarantor loans available, including other forms of unsecured and secured loans, which might be more suitable for the borrower. Before you agree to become a guarantor, check that these options have been explored, as this could help the borrower improve their credit score, making it easier for them to borrow in the future and meaning you don’t put your own credit rating at risk.
