There are many ways to borrow these days and if you don’t have the perfect credit score then that doesn’t necessarily need to be an obstacle. Loans that have a guarantor are one example of a bad credit loan i.e. borrowing even if your credit score is poor. If you apply for a guarantor loan then you are effectively giving the lender the reassurance of having someone else who will “guarantee” that the loan is repaid according to the terms of the credit agreement. But what is a guarantor and who can be one?
What is a guarantor?
A guarantor is a third party who agrees to meet the obligations you’re agreeing to if you’re not able to do so. The system of using a guarantor when it comes to financial obligations is an old one and actually pre-dates the credit scoring lenders use today to make decisions. It means that if you look like you might be a credit risk – for example, you have a low credit score – there is another option. Instead of being rejected completely for credit, you could be successful with the help of a guarantor.
Who can be a guarantor?
In theory, anyone over the age of 18 can stand as a guarantor for another person. However, the reality is that lenders are often looking for someone quite specific before they will accept a guarantor for a credit application. These are a few of the factors that lenders tend to look for in a potential guarantor:
A good credit history. Guarantors will often have their own credit rating checked by the lender, in addition to the checks carried out on the borrower.
Financially stable. The most appealing guarantors are those who can show that their finances are healthy so that they are in a position to cover the credit repayments should the need arise.
A homeowner. For many lenders a guarantor who is a homeowner is the ideal because this means there is a tangible asset to provide security if something goes wrong with the credit repayments – but many lenders will now accept non-homeowners.
A link with the borrower. A guarantor doesn’t have to be someone related by blood or marriage. However, lenders will be more convinced that the guarantor is committed to the responsibility if there is a clear link/relationship with the borrower.
A UK resident. If a lender has to take legal action against a guarantor then they will need to be UK resident for this to be successful.
Income and/or assets. If the guarantor is not a homeowner then there will need to be evidence of enough income and/or assets to cover the repayments that need to be made. This could be savings, an annual salary, investments and potentially a pension.
What does a guarantor do?
Initially, nothing. Checks are carried out against the guarantor and they will be legally required to sign a guarantor agreement. If you fail to make a repayment on a loan or other type of credit then the guarantor will be asked to make it for you. The responsibility for repaying the entire loan doesn’t then shift to the guarantor – repayments remain yours to make unless you’re unable to. If the guarantor refuses to make the payments then the lender can take legal action against the guarantor.
How do you choose a guarantor?
It’s important to choose a guarantor with care as it is a big responsibility. Use someone who is able to understand the impact of signing on the dotted line. Although the guarantor won’t have any right to the credit you’re borrowing they are making themselves responsible for its repayment and that can turn into a significant liability if you’re not able to meet the obligation.
Make a shortlist of potential people. Often, this starts with close family members and people you trust. Parents, brothers, sisters, grandparents or close colleagues could all be a good option.
Think about the financial stability of each of the people on the list. Could they afford to make the repayments for you if you weren’t able to? How would this affect their lives if that turned out to be the case?
Who on the list owns their own home? This will make a guarantor much more attractive to a lender, particularly if the purchase is not recent. Tenants or people who live with their parents won’t be that appealing as a guarantor for a lender.
Speak to whoever you have identified as your first choice and find out key information, such as whether they are willing to stand as your guarantor and what kind of credit score they have.
Make sure both of you are happy with the situation – and both understand what’s involved.
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 more about Amanda Gillam