Many lenders and landlords require guarantors on a loan and mortgage. A guarantor has great influence over the loan approval. Since lenders consider them before approving loans to individuals or businesses.
If a friend, family member, or associate has asked you to guarantee their loan, there are several factors to consider before agreeing to it.
You’ll need to demonstrate economic solvency and have in mind that there’s a chance you could be held liable for the whole load plus accrued interests if things go south.
The fear of taking on the loan responsibility shouldn’t prevent you from lending a helping hand. However, you should understand the risks involved. Below are some things to know before becoming a guarantor.
Who is a guarantor?
A guarantor is any third party that agrees to assume responsibility for credit on behalf of an individual or business. Essentially, they agree to repay the balance and interests accrued when the borrower cannot afford to repay. If the borrower clears the loan, the guarantor is off the hook, and no action is taken.
In the UK, guarantors are needed for different loan types. If you are renting property for the first time, say you are leaving home, or are a student, the landlord will require that you provide a guarantor. Landlords want assurance they’ll get their rent. Since students change residence often, insisting on having a guarantor adds security to their investment.
If one has a limited or poor credit history, they’ll struggle to acquire products like car financing and personal loans. Lenders are wary of individuals with a history of defaulted payments or thin credit history.
Other reasons one might need a guarantor include:
- Low salary
- They’ve just gotten a job
However, some lenders will offer these loan products to individuals with guarantors – provided they have a good credit score.
After doing your due diligence on why they’d need a guarantor, proceed to confirm the following:
- Are they responsible?
- Do they truly need the loan?
- If they default on the loan, can you afford repayment?
- Would covering their repayments affect your relationship with the individual?
As a tenant guarantor, if the tenant voids the tenancy agreement, you’ll either pay for damages or rent due.
Do you qualify as a guarantor?
Legally, anyone in the UK can be a guarantor – the borrower doesn’t have to be family. However, you’ll need to:
- Be either 18/21 years old depending on the agreement
- Be a UK resident so that the lender can take legal action if needed
- Have a good credit history
- Have sufficient income and assets to cover the debt
- Have a separate bank account from the borrower. This means you can guarantee your partner or spouse.
As a Guarantor, what are your rights and responsibilities?
Aside from knowing the value of the loan, you should also know your rights and responsibilities. As a guarantor:
- You have a right to copies of relevant loan transaction documents, including the guarantee letter
- You have a right to discuss the agreement with a lawyer before committing
- You can call upon the borrower to honor the loan and release you from the liability
- You are liable for the loan due in case of a default
Can I be removed as a guarantor?
Not quite. However, this depends on the agreement. Some guarantor agreements have provisions that allow termination of the agreement after some time. If no such provision exists, the guarantor remains liable until the loan is repaid.
What actions can be taken against a guarantor?
If the borrower fails to honor their obligation as per the agreement, a CCJ (County Court Judgment) can be passed against you. This means more interests and costs are added to the debt, and the CCJ reflects on your credit file for six years.
This also means that a High Court Enforcement Officer can be sent to you, or your employer receives an Attachment of Earnings Order to pay the court directly from your salary.
In the worst-case scenario, and you are a homeowner, an Order for Sale is applied against your property.
Will becoming a guarantor affect getting a mortgage in the future?
Helping a close friend or a family member secure a loan can affect your chances of securing a mortgage in the future. Mortgage lenders consider every aspect of your income and spending, including debt. As a guarantor, you are liable to pay the Solution loans you guarantee, which might impact mortgage affordability calculations.
What you should know about different bank guarantees
Pay attention to the type of bank guarantee you are presented with. Some require multiple guarantors, but responsibility and liability aren’t shared.
- Some guarantors are liable for the whole loan, while others are responsible for partial loan amounts. In such a case, limited money is needed for repayment.
- Under joint guarantees, the demise of a guarantor passes obligations to the surviving guarantors. It also means that the deceased’s assets are liable for repayment of the loan along with those of surviving guarantors.
Being a guarantor means you accept responsibility and liability for someone’s loan repayment. In case they default, the lender comes for you. The request should not be taken lightly.
Unfortunately, there’s little provision to get out of the agreement once you are in it. Think it through and get legal advice before signing on the dotted line.