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What are Guarantor loan debts?
A guarantor loan is when someone else, such as a family member or friend, agrees to repay the loan if you can’t afford the repayments. The person who guarantees the loan is responsible for any repaying debts on the loan.
Guarantor loans and mortgages are one way to help someone borrow money if they’re struggling to get approved by lenders – for example, this might be a young person with a limited credit history or someone with a bad credit history. There are risks involved for both borrower and guarantor, so you should enter a guarantor agreement armed with all the facts.
Rental agreements and mortgages can also be guaranteed in the same way.
Guarantor loans, a type of consumer credit, are usually marketed at people who have bad credit or have been turned down by other lenders.
Interest rates for many guarantor loans are high, often around 50% APR (annual percentage rate) or more. Larger guarantor loans are often paid back over several years.
Due to the high interest rates, you could end up paying back more than double the amount you borrowed.
Because the loan payments are guaranteed by someone else, the debt is similar to a joint debt where both people are responsible for paying it back if one person can’t. This can cause problems if you’re unable to afford the loan as the guarantor becomes jointly responsible for dealing with the debt.
How does a guarantor loan work?
- The creditor agrees to lend the money based on the guarantor’s ability to repay the loan in full.
- The guarantor will be asked to prove they can afford the repayments, based on their income, savings or assets. They may secure the loan against their property.
- Sometimes the loan money is transferred directly to the guarantor to pass on to the borrower.
- Before getting to the stage where the account defaults, try to agree on an affordable payment arrangement with the lender.
How does a guarantor loan work?
- If you fall behind with a guarantor loan or can’t afford to pay it, the lender will ask the guarantor to catch up with payments or take the payment directly from their bank account using a Continuous Payment Authority (CPA) which is usually set upon approval of the loan.
- If payments are not made to the account it will default and the lender can then ask the guarantor to make the repayments, or take the money from the guarantor’s bank account.
- The debt will be dealt with using the normal debt collection process which could involve the debt being passed to a collection agency or court action being taken.
- The default will be recorded on the credit files for both the borrower and the loan guarantor.
This places the significant risk on the guarantor, as they’ve agreed to repay the debt if you can’t.
If a family member or friend is your guarantor, the impact of them having to pay the debt could cause relationship problems, stress and financial difficulties. If they’ve secured the loan against their home, it could be at risk of repossession.
Are guarantor loans a good idea?
Although this type of loan might seem a good option for people who are looking to improve their credit file, it’s important that you and the guarantor are fully aware of the risks involved.
You should be aware of the cost of the debt and interest rates, as these can be quite high and lead to further problems. If you’re looking at guarantor loans for consolidating debt there may be other, more affordable options available to you.
Need help with a guarantor loan?
If you’re struggling to repay a guarantor loan, or you’re looking for help dealing with your debts, we can help. Take two minutes to answer a few simple questions, so we can understand the best way to support you.
What does being a guarantor mean?
Being a guarantor involves helping someone else get credit, such as a loan or mortgage. Acting as a guarantor, you “guarantee” someone else’s loan or mortgage by promising to repay the debt if they can’t afford to. It’s wise to only agree to be a guarantor for someone you know well. Often, parents will act as guarantors for their children, to help them take that first step onto the property ladder.
Can anyone be a guarantor?
Almost anyone can be a guarantor. It’s often a parent, spouse (as long as you have separate bank accounts), sister, brother, uncle or aunt, friend, or even a grandparent. However, you should only be a guarantor for someone you trust and are willing and able to cover the repayments for.
To be a guarantor you’ll need to be over 21 years old, with a good credit history and financial stability. If you’re a homeowner, this will add credibility to the application.
Whether you’re considering asking someone to be a guarantor, or you’ve been approached by a family member or friend in need, you need to be aware of the possible financial risks.
Why would someone need me to be a guarantor?
- They’re a borrower with no credit history (e.g. a young person, or someone new to the country)
- They’ve just started a new job
- They have a low salary
- They’ve got a low credit score
Before agreeing to be a guarantor you need to ask yourself:
- Why do they need me to be their guarantor – is it because they have a bad credit history? And if so, are they likely to manage the repayments?
- Are they responsible?
- Do they need the loan? (Is it for something they really need, or could they save up for it instead?)
- Can you afford to pay back the loan if they can’t or won’t?
- Would having to cover their repayments affect your relationship?
What happens if my guarantor can’t pay?
If the guarantor of your guarantor loan cannot afford to make the repayments, the lender will carry out an investigation into why this is and will help them find a manageable solution to this problem.
However, unless the guarantor’s circumstances change drastically, it is typically unlikely that they will be unable to pay for the loan. This is due to the fact that reputable lenders will always carry out thorough investigations into whether a guarantor can afford to make repayments, ensuring that they can meet the strict affordability criteria before the loan is approved.
Lenders will typically look at the following details before accepting a guarantor to evaluate their credit-worthiness:
- Credit rating
- Employment status
- Homeowner status (tenants also accepted by some)
By carrying out such checks and holding such strict criteria for guarantors, lenders help to reduce the risk of guarantors being unable to make repayments.