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When someone agrees to take on the role of guarantor for a credit agreement, they are taking on an agreement that sees them assume a degree of responsibility for the debt.
A loan guarantor is someone who promises to pay a debt or loan for someone else. This will only need to happen if the borrower is unable to make the scheduled repayments. Since the loan guarantor is bound by a legal obligation, the lender who has offered the loan will be able to demand these repayments are made by the guarantor should this situation arise. When agreeing to act as guarantor for someone else who is seeking new credit, the guarantor is effectively committing to make the payments themselves if the other party fails to. That means that by accepting the responsibility for the debt, the lender in question may register a record of the loan on your credit report too. Therefore any lender carrying out a credit check on the guarantor would require knowledge of all financial commitments when they work out what further credit they think you can afford to take on. Acting as a guarantor is also likely to create a financial link between the guarantor and the borrower’s credit reports. As a result, any lender you approach can also review the credit report of the borrower in view of the financial relationship between you. It is therefore crucial that the implications of the role of the guarantor are made clear at the beginning of the agreement.
Taking on the role of a guarantor is taking on a big responsibility but is also a very worthwhile thing to do. If the borrower has a poor credit rating, they will receive the opportunity to improve it by using the good credit rating of their guarantor. However, the guarantor is still taking a significant risk because they become liable for the loan repayments if the borrower cannot make their repayments on time and in full.
If the borrower of the loan pays it as agreed, it can have a positive effect on the credit report of the guarantor as well as their own. The account will show as “current” with an on-time payment history. Accounts that are being paid as agreed help to maintain a good credit score because they have demonstrated a high degree of financial responsibility whether it is your own account or one that you have guaranteed.
If the borrower of the loan defaults on their payments, it will have a negative effect on your credit. When the agreement is co-signed, the guarantor will be considered to be 100 per cent responsible for the loan even if they do not receive any of the money. If the guarantor does not take over the payments or repay the balance, it will count against their credit score in the same way that any other delinquent account would. They will also most likely receive debt collection calls if the repayments are not made and can be sued for the loan. If they lose in court, they will have a judgement on their credit report which will cause significant damage to their credit score.
We have a detailed FAQ that also covers questions you may have if you have been asked to be someone’s guarantor.
For more information about this and many other personal finance products visit Solution Loans
Amanda Gillam is Solution Loans's General Manager and has been since 2009. She is also a prolific writer on personal finance issues, and has been quoted numerous times in articles published on 3rd party websites and in press releases. Her...Read about Amanda Gillam
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