- Amanda Gillam
- 14th October, 2014
- Guarantor Loans
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.
What is a Loan Guarantor?
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.
A Responsible Role
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.
Positive Effects
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.
Negative Effects
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.
Got Questions?
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
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Thanks for the details. You raise a number of points one or more of which if correct might make the contract unenforceable. However, we are not in possession of all the facts from both sides. We would recommend that you make sure you have all the facts and then have a conversation with your local Citizen’s Advice.
I am seeking to obtain all the facts, and have asked for information from the loan company to ensure I both know everything, and know the extent of their records.
I have asked for copies of all letters sent to the guarantor, a copy of the recording of the telephone conversation with the advisor who ‘sold’ it to the guarantor, and a copy of the affordability assessment performed on the guarantor. They did send me a copy of the repayment schedule to date, which is the only item on my list that they have actually supplied.
What were the points you think might make the guarantee unenforceable if I am able to prove it to a court?
I did think the fact that the credit agreement and the loan have different periods was a concrete reason however I found this in the T&C’s of their guarantor agreement
This Guarantee and Indemnity will not be affected by any change to the Credit Agreement.
As this was supposed to be a fixed term loan, not a revolving credit facility, I did consider this as a potentially unreasonable condition that might in in itself be unenforceable and make the guarantee unenforceable too?
At the moment they are ignoring the request, and have just sent me a copy of the Credit agreement and the guarantor agreement.
My partner agreed to be a guarantor for her brother. She was given a copy of the consumer credit agreement and a guarantor T&C’s sheet with the recommendation to seek independent legal advice or speak to the citizens advice bureau hidden within. Her attention was not drawn to this, and she was given no advice around the impact it could have on her credit file. Her brother pressured her into electronically signing the agreement on the day she got it because he was desperate for the money.
Her brother has subsequently failed to meet the monthly payments on a regular basis. The company has called her, and asked her to pressure him to pay, which she has done on each occasion. Nothing more was heard from them each time. Her brother led her to believe he had made up the payments, and she believed that to be the case given the loan company didn’t chase her further.
She has just given me the authority to speak to the loan company. I have found that while the loan agreement paperwork said 13 month loan 13 repayments, the loan was subsequently changed to a 15 month loan without her being notified. It also transpires that the company was not getting full payments on her chases. As a result there are £2000 of arrears and accrued interest . The 15 month period is due to end this month.
As the agreement wasn’t what appears on the Consumer Credit Agreement, and the company had not kept her informed that the missed payments were not being made up, can they now enforce the guarantee and demand the balance at this late stage, or have they breached the agreement to the point we have a case to make around the guarantee being unenforceable and that my partner should be released from the commitment?
I would never ask my mum or dad to be a guarantor for a loan TBH. They don’t earn a great deal, and if I ever found I was not able to pay the loan back, then what? That would leave them right in it.
I don’t understand why people want to drag their parents along with them into debt.
I have been in difficult situations financially in my life but at no time would I ever have expected my parents to risk taking on debt for me. My financial responsibilities are my own – that’s not to say I haven’t borrowed the odd tenner from them.
Each to their own, but I wouldn’t condemn anyone who refused to be a guarantor and not to be mixed up in someone else’s finances.
I know plenty of friends who have been helped out by their parents using a guarantor loan – often it’s that ridiculous cycle – because they have never had credit they can’t get credit as they don’t have any repayment history to prove they are a good risk to the lender.
There are lots of people out there who would be sensible borrowers if they could actually borrow some money.
I know there has been some talk about guarantor loans being risky when the guarantor doesn’t always realise they could have to repay the whole loan if the borrower can’t. But beggars can’t always be choosers.
Glad to hear the guarantor loan worked out for you Alan, and for your daughter. You’re right that guarantor loans may not be perfect (but then what loans are?) but they can sometimes be the only solution available in certain circumstances. And providing both the borrower and the guarantor are fully aware of their responsibilities, and that their credit records will both be linked then they can be a good option.
Like with any borrowing you need to make sure you know exactly how your loan works and what might happen if you can’t make the monthly repayments.
My daughter is single and nearly 30 so had had enough of living at home or in shared houses so started looking for a flat of her own. After nearly 2 years she found a place a couple of miles from me – it was a maisonette in a fairly bad state but 2 bedrooms so she could rent one out to help with the mortgage and other costs. Trouble was in the 2 years she had been looking prices had kept rising (we’re in Sussex) so when she found it she didn’t quite have enough deposit to get the mortgage she needed.
She’s got a good credit record and a good job (ironically with a bank) and was expecting a promotion and pay rise by the end of the year. She’s sensible with money so I agreed to be a guarantor on a guarantor loan she took out to raise a bit more cash to buy the place. I know that people who take out guarantor loans end up with a link to the actual borrower and their credit record but I wasn’t worried about that as I trust my daughter and wanted to see her with a place of her own.
She’s now been in her maisonette for 5 months – she has made all the loan repayments and she did get the promotion and pay rise so it’s all working out well – for both of us. Guarantor loans might not be the ideal solution but in my case it has all worked out and without it my daughter couldn’t have afforded a home of her own.