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For someone without a great credit score, finding a friend or relative willing to be a guarantor can be a simple solution to getting rejected for credit. If you’re willing to stand as a guarantor for someone you know then you’re doing them a great favour. However, it’s also important to understand what you’re signing on for and what might happen if they’re not able to pay back the loan.
If you decide to be a guarantor then you’re guaranteeing the obligations of the person who is taking out the loan. In practice, that means that if the borrower can’t make any repayments on the loan you’ve agreed that the lender can demand them from you instead. Guarantors are asked to sign a guarantee agreement – this is a legally binding document and once you sign it you become responsible for the loan repayments if the person you are acting as guarantor for cannot pay.
It all comes down to how creditworthy the borrower is. If there is any reason to doubt that they might be able to repay the loan – for example, they have a poor credit score – the lender will look for backup in case there is a default. The guarantor is the backup that enables the lender to advance the loan without taking all the risk onto their own shoulders – hence the term “guarantor loan“.
The lender can come directly to you, the guarantor. If the lender decides that it will be simpler and less costly to pursue you for what is owed, as opposed to the borrower, then you will be the first port of call after a payment default. You will then be obliged to make the payment that the lender is requesting, in line with the guarantee agreement signed.
Lenders must be responsible and take steps to ensure that you would be able to make the payments you’re agreeing to as guarantor should that situation arise. Most lenders will recommend that you take independent legal advice so that you know what’s involved. If you don’t, lenders must communicate to you key information, such as what your liability will be, the fact that it can be limited, whether you’ll be told if the borrower gets into difficulties and what clauses in the credit agreement affect you (e.g. interest).
As a guarantor, there are a number of ways to protect yourself, from the debt and also from making a poor decision.
Before you sign anything:
Once the guarantee is signed:
Alex Hartley is a keen advocate of improving personal finance skills. She's worked at Solution Loans since 2014 and written hundreds of articles about how people can manage their money better. Her interest in personal finance goes way back to...Read about Alex Hartley
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