Does Being A Guarantor Affect Your Credit Rating?
There are many reasons why someone might need you to be their guarantor, but does being a guarantor affect your credit rating, and if so, can it also affect your creditworthiness for things like mortgages and personal loans? Find out the answers to these and a number of other important questions in this guide.
A guarantor loan can be a way for people who might be struggling to be approved by lenders – due to factors such as having bad credit – to borrow money.
However, while there’s the positive that being a loan guarantor can allow others to become borrowers, if you’ve been asked to be one you should have a thorough understanding of what your responsibilities are before you agree.
This is because being a loan guarantor can come with risks for you and the borrower and potentially impact your finances and your ability to borrow in the future. So to help you avoid such issues, this guide breaks down what you need to know, so you can make an informed decision.
What is a loan guarantor?
When you’re a loan guarantor what you’re doing is offering to ‘guarantee’ to cover and pay off the debt of the loan if the borrower is unable to do so.
In most instances you’ll just be expected to make the repayments for them, but with some lenders you may also need to put forward some collateral as well – for example your home or vehicle – to secure the loan.
Can anyone be a guarantor?
If you’re over the age of 21 and live in the UK you may be eligible to be someone’s guarantor. More often than not you’ll be asked by somebody you know, like a relative or close friend – in other words, someone with whom you have an existing relationship and a level of trust.
What else may be required?
On top of your age and confirmation of your residence, there are a number of other eligibility criteria that you might need to meet for some lenders. This includes:
- Having a UK bank account – so the lender knows where to send the loan for you to pass on to the borrower and to take payments from if necessary.
- Having different contact details to the borrower – there has to be two clear points of contact with such loan agreements.
- Being a homeowner – some lenders will want you to own a property and have this as collateral for the loan. This can also be important for determining the size of the loan.
- Making it clear you understand the terms of the loan – you might be required to go through the full agreement with the lender for confirmation.
- Having good credit or not having any bankruptcy or CCJs in your credit history – this will be to help the lender assess your creditworthiness as a guarantor.
Why might I be asked to be a guarantor?
As we mentioned earlier, one of the main reasons someone may ask you to be their guarantor is that they aren’t able to secure a loan themselves – most likely due to having a poor credit score or no credit history. Lenders will invariably view individuals like this as being a higher credit risk, subsequently limiting their chances of approval.
In addition to being someone the borrower can trust, you may also be asked to be a guarantor because you have a good credit rating. This is because your good credit can show lenders you’re the more financially stable party in the agreement and can improve the chances of the guarantor loan being approved.
What checks are carried out by lenders?
Alongside their verification of your identity, most lenders will want to carry out a couple of other checks.
The most common is a credit check, which they’ll do to look over your credit history, find out your credit score and then assess if you’d be a suitable guarantor who can successfully make repayments if required.
Another check they might also run is an ‘affordability check’, which is to determine whether the size of the loan the borrower wants to take out is appropriate based on your income. This means you might be asked to provide evidence of your monthly wage, your savings and assets and any other existing credit or repayment plans.
With all this though, you’ll also find that these checks and the amount of information you need to provide can differ from lender to lender, often it simply depends on their specific policies.
As a guarantor, what am I liable for?
When you sign your guarantor agreement, you’ll be legally bound to make the repayments if the borrower defaults on the loan.
Will being a guarantor affect my credit rating?
To answer the key question of this guide, your credit rating won’t be affected by being a guarantor, providing the borrower is successfully making their repayments in full and on time.
However, if they don’t make these repayments and you then need to start covering these, this is where your credit rating could be negatively affected.
How can my credit rating be negatively impacted?
Failing to stick to a payment plan or agreement is one of the main causes of bad credit and if you then also fail to make your repayments as the guarantor on time or at all, this will be added onto your credit file. If you then continue to have issues keeping up with the repayments, these will keep being registered in your credit history and your overall score will start to go down.
The knock-on effect of this decline is that your own chances of being approved for things like your own personal loans, credit cards or even mortgages will also start to be reduced.
Can I still be a guarantor if I have bad credit?
With this in mind, if you have bad credit it can also limit your chances of being approved as a guarantor. This also depends on the severity of your bad credit and lenders will assess how creditworthy you are as a guarantor, in the same way they would assess a borrower.
Could being a guarantor affect me from getting a mortgage?
This is another common question people ask about being a guarantor. As mentioned, if you become a guarantor and fail to make the repayments when you’re required to, the damage to your credit score can affect your chances of accessing mortgages and/or being approved for more favourable rates and deals.
Some mortgage lenders may also penalise you for being a guarantor – even if the borrower is comfortably making repayments. This is because when they ask for a breakdown of your income and your outgoings, they may consider the potential debt you might have to take on as a risk to your ability to make your mortgage repayments.
However, this isn’t always the case. By simply explaining the terms of your agreement as a loan guarantor to a lender during your mortgage application, it can help reassure them that the level of risk to your creditworthiness is low.
What are the benefits of being a guarantor?
Alongside the main benefit of being able to help a family member or your friend to access the financial support they need, there are other positive rewards in being a guarantor.
If the borrower successfully pays back the loan amount, this can help to give their credit score a boost and potentially show them how to be more responsible for their own finances. What’s more, with an improved credit score they could then be able to independently access loans or other credit in the future.
Moreover, you could start to improve your own credit score as well, if you have to step in and make the repayments. However, this is of course providing you successfully cover the debt.
Can guarantor loans be written off?
Unlike many other types of loans, guarantor loans can’t be completely written off if the borrower declares bankruptcy. While the borrower would be exempt from paying off the loan in this situation, you’ll still be liable to do so as the guarantor.
If you as the guarantor declare bankruptcy, the borrower would then be under additional pressure to make the repayments. However, if they then also aren’t able to keep paying them back, you’ll still be obliged to cover this as the guarantor and lenders may take legal action, seize your assets or repossess your home.
What if I don’t want to be a guarantor anymore?
If the guarantor loan has been approved and you’ve both agreed to the terms, you are legally bound to this and obliged to continue. The only way you can stop being a guarantor is if the borrower or yourself pays off the debt.
It’s reasons like this and those we’ve listed above which highlight why you should make sure you understand the agreement, can afford any repayments and trust the borrower. Only then can you be completely certain being a loan guarantor is the right decision.
Other options for borrowers
If you decide you don’t want to be a loan guarantor, you may want to recommend that the family member or friend considers other options if they’re in need of financial support.
Encourage them to:
- Ask their family or friends if they could borrow from them directly.
- Look at what different types of loans they might qualify for.
- Thoroughly assess the loan markets and see what deals and rates different lenders are offering.
- Review their existing savings and possibly sell some personal items to gather more finance.
Another option would be the 18-month personal loans we have here at Simple Fast Loans, as these don’t require a guarantor and we consider each application on a case-by-case basis.
This means that even if they have bad credit or a poor credit history, we’ll consider them and they could access loan amounts of between £250 and £1,000. Better still, if they apply now and get approval, they could get their loan in their account by bank transfer within just 60 minutes. So be sure to point them in our direction to see if we can help.