21 Oct What Are The Responsibilities of a Guarantor?
The main responsibility of the guarantor is: If the main borrower defaults on their loan, the guarantor will be required to step in and repay on their behalf.
This is confirmed in the original pre-loan agreement signed by both parties, meaning that the guarantor becomes legally obliged to make these payments.
If the main borrower is unable to make payments on the guarantor loan that is taken out, the lender will always try deal with the main borrower first and only use the guarantor as a last resort. The lender will use phone calls, emails and letters to the main borrower, before calling upon the guarantor. The lender wants to avoid using the guarantor at all costs.
Being a guarantor can be a very important responsibility, and given the loan sizes of £5,000 and £10,000, you may find yourself responsible for quite a large payment. However, you will rarely be required to pay this in full, only through monthly instalments.
Either way, it is important to know what responsibilities there are:
What is involved in the process of becoming a guarantor?
If you decide to be a guarantor for someone, you can expect the following:
- You will need to give permission: It is best that you speak to the main borrower before you agree to become a guarantor.
- The loan agreement will need to be co-signed by you during the application process online. This should highlight the loan amount, the potential fees and what you could end up repaying if the main borrower defaults.
- Checks before the loan is funded: A soft credit check is carried out against your name, so it will not impact your credit score. Usually a guarantor with a better credit score is able to help the customer get approved.
- Funds are sent to you (not the borrower): If successful, the loan will be given to you first (The Guarantor). This is a standard security measure to ensure the funds go to a person with good credit. You will usually have a two week cooling-off period where you can return the funds back to the lender with no extra charges. If you prefer, you can give the money to the borrower in small chunks or instalments, if you want to watch them manage their money.
- You may need to pay: The most important part of agreeing to be a guarantor is that you may be required to make repayments if the main beneficiary does not. You should therefore have money saved and put aside just in case.
What if the guarantor does not make the repayments?
- In the event that neither the main borrower or the guarantor, make repayments on the loan, then the lender in will report this default to the main credit reference agencies in the UK, which will have a negative effect on both your credit scores. This could harm your ability to gain access to further credit in the future.However, lenders can be lenient towards a guarantor and can ask for smaller repayments to help pay off the debt, this is known as an ‘arrangement‘ or ‘payment plan.’
Important things to consider prior to becoming a guarantor
- It is strongly recommended that you only agree to become a guarantor for someone you a strong relationship with and that you communicate well with. You need to be fully aware of the reasons why the borrower needs financial help.You also need to consider the length of the loan such as 5 years and whether you are in constant contact with the person.
- A sibling, parent or family member is a common person who could be your guarantor. But a work colleague, boyfriend or girlfriend who you may not necessary speak to in a few years’ time, could be a higher risk.For example, perhaps the main borrower is looking for a guarantor to improve their current credit score as they have a bad credit history. If the guarantor is confident that the borrower will make repayments and considers being their guarantor low risk, then it is more likely you will go ahead and become a guarantor.However, if the main borrower is simply looking for a guarantor for a non-urgent purchase and seemingly has no financial means in order to make loan repayments, then the potential guarantor should weigh up very carefully if it is worth getting involved. It may be better to advise the borrower on other alternatives that do not involve a guarantor, such as becoming a part of a credit union or getting a secured loan instead.