It is far from uncommon nowadays for someone to be asked to be a guarantor for a friend’s or relative’s loan. Whilst it is certainly a compliment that the person asked to be a guarantor is trusted enough for that to be the case, it is very important to understand the pros and cons of accepting that role.
What is a Loan Guarantor?
First and most importantly, before discussing the pros and cons of being a loan guarantor, we should first explain what the role actually entails.
Loans with a guarantor require the presence of someone who agrees to be ultimately responsible for the payment of the borrower’s debt should they default on payments. It is of the utmost importance that anyone who is contemplating fulfilling this role understands that being a guarantor is not just a ceremonial role and has the potential to require them to pay off the loan.
Guarantor loans have been created to allow applicants with a poor credit rating or no credit history to successfully apply for a standard personal loan. The presence of a guarantor is absolutely vital to enhance the prospects of the application being granted.
What Does a Guarantor Need to Know?
Being a guarantor can be a risky proposition at times because no matter how well you know someone, it is not possible to guarantee another person’s behaviour. However, since it is very subjective, although personal feelings will obviously play a part in the decision making process, the final decision on whether to accept the role of the guarantor should be based on the knowledge of the borrower’s financial capabilities of paying off the loan.
One of the most important questions to ask yourself in the decision making process is ‘am I ready to repay the loan?’ If the answer is a firm yes, then that would certainly be a positive but if the answer is no, then you have to base your decision on a stronger reason than ‘he/she is a close friend or relative.’
If the decision is made to become a guarantor, it is also crucial to understand that there is no turning back. Once the loan has been agreed it is not possible to revoke your guarantee. Therefore, before you do sign the dotted line, check whether the contract tells you the amount you are guaranteeing, the situations in which you will have to repay the loan and if the amount to be borrowed can be increased without you being told.
Does the Guarantor Have to fulfil any specific Criteria?
A guarantor will be expected to satisfy all of the standard requirements relating to age and income applicable to a borrower.
The guarantor must be a homeowner, not because the loan is secured but to allow easy tracking should they need to step up and make loan repayments. The guarantor must have a good credit history and be in receipt of a regular income. Anyone can stand as a guarantor providing they are not financially linked to the applicant such as a spouse or partner residing in the same property. Family members, friends and work colleagues are all popular choices as guarantors.
Under normal circumstances, only individuals can act as a loan guarantor. The guarantor basically provides security on behalf of the borrower to the bank. If the borrower fails to repay the loan amount or other dues to the bank the guarantor will make good that shortfall. The guarantor has to enter into a deed of guarantee where he agrees to make the payment in the event of the applicant failing to pay by the due date.
Ultimately, loan guarantors are doing a very good deed by helping someone to secure a sound financial footing when they would otherwise be unsuccessful in their loan application. After all, you will only be required to step up and make repayments should the borrower fail to do so.
Bio – Amanda Gillam
I work as a blog writer for a finance company called www.solution-loans.co.uk which specialises in Guarantor Loans. I hold a degree in financial management and enjoy writing about a variety of topics including finance, transport, travel, sport and business.