Guarantor loans were one of the fastest-growing areas of the UK credit market during 2016. That is hardly surprising given that these loans have extended credit to hundreds of thousands of people denied lending by the major banks because of financial mistakes they have made in the past. Guarantor loans are based on the principle of security being provided by a third party – somebody who is willing to guarantee the loan payments should the borrower get into difficulty at some point during the lifetime of the loan. Anybody (well, there are a few rules) can become a guarantor for somebody else and most guarantors are family members, close friends or colleagues of those who apply for a new loan.
But while you may be clear about your responsibilities when it comes to applying for a loan in your own name, you may be unsure about what is involved when you guarantee somebody else’s borrowing. While you’ll probably be keen to help somebody close to you who is unable to borrow with their own credit record, it’s vital that you are clear about what you are signing up to when you agree to become a guarantor.
You’ll probably be inclined to help the borrower, particularly if he or she is a member of your immediate family. But when you agree to become a guarantor, you are getting into a financial relationship with somebody else and it’s important to know that they are responsible with money. The borrower may be one of your children and you might feel that you have a moral obligation to help but you must remember that if they are prone to financial recklessness, that may have a serious effect on your bottom line if things go wrong and you have agreed to be their guarantor. Are you confident that the borrower will make every loan repayment on time and that you won’t ever have to step in? Is the person asking you to be a guarantor committed to financial transparency and ready to share their bank statements and household budget with you?
Can you afford it if things go wrong?
Just because you want to help doesn’t mean that you can afford to. You might not actually be able to live up to your end of the bargain if the borrower defaults on the loan. If this happens, it is possible that the lender might expect you to repay all the capital borrowed plus interest in one go. If that happens, then it’s your credit record which will suffer should you be unable to pay up. And if you have got the money, what will the effect of having to part with it be on the rest of your household finances?
Why did they ask you?
If the borrower is too young to have a full credit record of your own, your agreeing to be a guarantor will give him or her access to lower interest rates and repayments than if they had simply applied for a poor credit unsecured loan in their own name. But it is possible that you are being asked because the borrower has a bad credit record thanks to years of financial mismanagement. Do you really want to get into such a close financial relationship with such a person?
Ask for full financial transparency
Before you agree, ask the applicant to let you see their bank statements, household budget and their salary records to give you the confidence you need to become a guarantor. Full financial disclosure is vital when you are not in a very close relationship with the borrower. He or she should be happy to share their credit reports and all their monthly expenses including rent, food budget, utility bills, mobile phone contracts and, entertainment with you.
Make sure you know what you’re signing up to
While the lender will send you all the terms and conditions of the loan as well as to the borrower, it’s a good idea to make sure you read all of the small print before you sign a loan agreement.
Oliver Jones has written for Solution Loans since 2016. His passion for personal finance comes through in the 200+ blog posts he's written since that time. His talent for explaining all things money means he's covered topics as diverse as...Read more about Oliver Jones