While you will often read that almost anybody can be the guarantor for a loan, there are some important things to think about before approaching somebody to provide the security needed in order for you to borrow some money. Most guarantor loan providers will say that they will happily take anybody you have a good relationship with – a family member, a close friend or a colleague at work perhaps – as a guarantor.
In fact, there are generally no restrictions on who you can ask to be a guarantor except that this person cannot already be in a financial relationship with you or linked to you financially. That rules out anybody who you have a joint mortgage, joint bank account or other shared credit agreement with. It also usually rules out a husband, wife or civil partner.
Asking somebody to be a guarantor is a significant undertaking and should not be done lightly. Remember that should that person agree and the lender accept your application, you are going to be entering into a financial arrangement with the guarantor for months or several years. The loan agreement which you will both have to sign will be a legally-binding document and one or both of you could be faced with legal action should you not keep up with the repayments or otherwise default on the loan. This may sometimes be referred to as a promissory note, however, there are times that this could be classed as invalid, so checking out ‘when is a promissory note invalid?’ will help you set the record straight about any loan agreements that you have.
You should also remember that the person who acts as guarantor will be putting their financial stability and credit record on the line for you. Should you fail to keep up with the loan repayments then the lender will be perfectly within its rights to expect the guarantor to make good any delinquency on the loan account. This may include a sizeable amount if you are seriously in arrears and, in some cases, the lender might issue the guarantor with a default notice and take them to county court to recover the outstanding amount. In the worst-case scenario, the guarantor may have to repay the loan in its entirety.
Clearly, this is not an arrangement to enter into lightly as a failure to keep up with the repayments could end up affecting a friendship or a relationship with a family member.
Before choosing somebody to be your guarantor, you should ask yourself some serious questions about your relationship with that person and what their circumstances are:
How well do you know them?
Most people have got a lot of acquaintances and friends. But how many very close friends do you have? How many of these people would you be prepared to trust money with? Would your relationship with them withstand financial difficulties which they have a legal obligation to put right should you fall into arrears on loan payments? If the person you are considering is a parent or perhaps one of your grown-up children, would that person feel uncomfortable being a guarantor but also that they were under some sort of moral obligation to help?
Do you have confidence that the person you are asking to be a guarantor will be willing and able to help out should your circumstances change and you get into trouble with the repayments?
Are you happy to disclose everything?
The person that you are considering would be within their rights to ask you for full financial disclosure before agreeing to be your guarantor. Are you comfortable showing them your household budget and revealing to them the extent of your income and outgoings? The guarantor might also insist that you supply them with details of your income and expenditure every month throughout the lifetime of the loan to give them early warning that you are getting into financial difficulty. Would you be comfortable with this? If the answer is ‘no’, then you might have chosen the wrong guarantor.
How secure is the guarantor financially?
The person you ask to be your guarantor might appear to be financially successful but appearances and reality can be completely different. If you get into trouble with the loan, then the guarantor will be expected to put the situation right. But if he or she is unable to, then both of you could be left facing serious financial consequences.
How good is their credit record?
The lender is probably going to be relying upon the credit record of the guarantor rather than yours when making its decision on the loan. Are you confident that the guarantor has a good credit record before you make the application? Remember that if the lender turns you down, this might appear on your credit record and that of the guarantor as a credit search and may affect both of you when it comes to obtaining credit in the future.
How old is the guarantor?
Most lenders will accept applications where the lender is aged between 18 and 65. Some lenders will accept somebody who is aged up to 75 but this is an exception rather than a rule. But before you ask one of your parents or grandparents to guarantee your borrowing, you should determine whether their weekly or monthly income will be enough to make the payments should you be unable to do so and still leave them enough to cover all of their other outgoings.
Be clear about the loan’s terms and conditions
Although the guarantor will receive a copy of the loan’s terms and conditions once the application has been received, it is a good idea to make sure that they are fully aware of these before you make the application. If you don’t do this then there is a risk that they will be unaware of something important about the loan and only find out once they are locked in as a guarantor and the funds have been issued.
Article provided by Mike James, an independent content writer in the financial sector -working alongside a selection of companies including Solution Loans, a technology-led finance broker with a broad range of products and many year’s experience advising in clients what their most suitable type of credit may be.