Should you be a guarantor for a loan?
A guarantor helps someone get a loan by agreeing to pay it back if they can’t. Here are the risks you need to consider when deciding whether to become one.
Becoming a guarantor – to help your child or grandchild get a loan for example – is a serious financial responsibility and one that should not be taken lightly. Before you agree to become a guarantor, you need to think careful about what it involves and the potential risks.
What does a guarantor have to do?
As a guarantor, you agree to pay back a loan if the main borrower can’t. To have a guarantor, the main borrower needs to apply for a specific guarantor loan.
Guarantor loans are usually for those who have a bad credit history. Once they have the loan they can improve their credit rating if they keep up with the repayments.
Most guarantors are family members, other relatives, spouses (who do not have joint bank accounts) or very close friends. As a guarantor, you take full responsibility to pay back the loan if the borrower doesn’t. If the borrower misses just one payment the lender can chase you for the money before the original borrower.
Some lenders will pay the loan into your bank account, rather than to the person applying to borrow the money. So you may have to transfer the funds to the borrower's account yourself. Alternatively you can choose to return the money after a 14-day cooling-off period.
If the main borrower consistently repays the loan on time, you will not need to do anything.
Why do lenders ask for a guarantor?
Lenders usually ask for a guarantor if the person applying for a loan has a poor credit record or is borrowing for the first time and thus has no credit history.
You need to be more financially reliable than the borrower. The lender will probably not approve a guarantor loan if you also have a bad credit score.
Can anyone be a guarantor?
To become a guarantor, you must be over 21 years old, have a good credit record and be financially stable. You must be able to prove that you can afford to pay back the loan if the borrower can’t and will have to provide bank statements and proof of ID.
Lenders tend to prefer guarantors to be homeowners, be in full-time employment and not have any joint financial accounts with the borrower.
If you’re going to be a guarantor it should be for someone who is happy to be open about their finances with you.
What are the risks of becoming a guarantor?
The biggest risk for a guarantor is having to pay back the loan because the original borrower doesn’t or can’t.
This means you need to be confident that the main borrower can afford the loan and that they'll always pay it on time. You need to trust them because if they fail to repay the loan, it will have an impact on your credit file. A bad credit score makes it harder for you to get credit in the future.
You must also be financially capable of repaying the loan if they default on the payments. If you can’t, the lender will chase you for the money.
You should also bear in mind that it could affect your relationship with the main borrower if things go wrong.
Does being a guarantor appear on your credit record?
Being named as someone's guarantor will not appear on your credit file. And provided the main borrower pays back the loan on time, your credit file will remain unaffected.
Most guarantor lenders will run a credit check when you apply to be a guarantor, which will appear on your credit record but won’t affect your credit rating.
If the main borrower defaults and you are asked to pay back the loan at any stage the loan will be added to your credit record, including the defaults, and it will be as if you’d taken out the loan yourself. If this happens it can negatively affect your credit rating and your ability to take out credit in the future.
Can you change your mind about being a guarantor?
No. Once you've signed the paperwork agreeing to be a guarantor for a loan, you cannot back out.
There's usually a 14-day cooling-off period, so you could back out during that time, but the borrower would need to give back the full loan amount. They can’t keep the money from a guarantor loan without the original guarantor.
What if you can’t pay back the loan?
If the borrower defaults and you are unable to make the payments for them, it can have serious consequences, including:
Damage to your credit record
Being taken to court
Repossession of your home or other assets
What should you do if you cannot pay your debts?
Protect yourself against any missed payments
If you agree to be a guarantor, take precautions. For example:
Read all the documents carefully
Check how the borrower plans to pay the loan back
Put some extra money aside just in case they miss any payments
Sign an agreement with the borrower stating how they will pay you back (if necessary)
Some lenders ask guarantors to list a possession as additional security. This item has to be worth more than the loan and, in extreme cases, could be repossessed to cover the loan. Listing your property would put it at risk and is best avoided.
Some lenders accept other possessions as security, such as vehicles. Not every lender will ask for a possession to secure the loan against.
Guarantor FAQs
What happens if the main borrower dies?
You could be forced to pay back the rest of the loan. Check the terms and conditions of the loan.
Could my home be put at risk?
Only if both the borrower and you are unable to pay back the loan. In that instance, the lender may apply for a charging order to force the sale of your home.
Do I have to be a guarantor if asked?
No. No one can force you into being a guarantor. But if you've signed the paperwork agreeing to be a guarantor, you cannot back out after the cooling off period (usually 14 days).
Need a loan? Compare loan lenders side by side to find one that is cheap to pay back, lets you borrow what you need and has repayments you can afford.