What it means to be someone’s loan guarantor

By | March 29, 2016

canstockphoto5799028Anybody can become a guarantor for somebody else. There is not a legal requirement that means they have to be a parent or related to you in any other way. That means that anybody can come forward although, in the main, most guarantors are family members, close friends or colleagues of those applying for a loan.

While we all know what it involves to apply for a loan, we may be less sure about the process involved in becoming a guarantor. If somebody has asked you to help them get a loan in this way, then it’s important that you know what you might be agreeing to. This is a significant commitment on your part and will mean that your continued good credit record will be dependent upon the actions of somebody else. You should not get into such an arrangement without first fully appraising yourself of the facts, the terms and conditions of the loan and what you will be required to do should the borrower fail to keep up with the repayment schedule. In these cases, the lender will require you to step in and bring the account into order by making up the repayment shortfall or, in some circumstances; you pay back the entire loan plus interest in one go.

Before agreeing, here are some other things that potential guarantors should know about this increasingly popular form of borrowing:

It can affect relationships when things go wrong
While you might be an easy-going person, relationships can become strained when you are financially linked with somebody who turns out to be reckless with money. Just because that person is a son or daughter does not make it any different. You may feel some kind of moral responsibility to stand as guarantor if asked by one of your offspring but be in no doubt that their behaviour could have a serious effect on your bank balance.

When someone asks that stand as a a guarantor, you need to be confident about how much you know that person and to what degree you trust them. Should you agree, are you happy that that person will make all of the loan repayments on time and that you won’t ever have to help out? Are they being open with you about their need to borrow money? How happy are they to show you their bank statements and their household budget? Ensure that you are happy that you know and trust the person concerned before you sign an agreement to avoid any difficulties later on.

How good are your finances?
We all want to help, particularly when the person in need of our assistance is somebody close to us, but just because you feel a moral responsibility does not mean that you have to act on it. You may not actually be in a position financially to help out, particularly if the applicant goes on to default on the loan and you have to step in and repay all of it plus interest. Remember that it’s your credit record that you are putting on the line here. Your financial stability could be affected for some time should the borrower renege on your agreement and bail on making repayments.
If that happens, it will be you and your family who will suffer and your relationship with the borrower might get into difficulty as well. If you are not sure that you have enough disposable income to make the repayments, then you really should be thinking again about becoming a guarantor.

Why were you chosen?
The applicant might be a young person without a credit record of their own and so unable to access mainstream credit. It’s perfectly natural for that person to come to you and ask for your help, particularly if you have an excellent record of financial management. Your assistance will give them access to lower interest rates and more affordable repayments than if they had tried to get an unsecured personal loan. However, if they have an atrocious record of financial management, you should probably be asking whether you really want to be financially linked to them. Do they regularly seem to be living beyond their income, have no kind of financial record, do they not open their bills and bank statements?

How honest are they?
When somebody asks you to become a guarantor, they should be willing to open up their accounts, their bank statements, their household budget and their wage slips to you. You should insist upon full financial disclosure before agreeing to move forward. The applicant should be willing to show you’re their credit reports and all of their monthly expenses including rent, food budget, utility bills, mobile phone contracts, entertainment expenses and so on. What happens if their circumstances change? Will they still be able to keep up with the repayments without asking for you to step in?

Read the terms and conditions

You will get a copy of the loan agreement and its terms and conditions when the applicant is successful. But you should acquaint yourself with these in advance of an application. There’ll be a lot of small print and you will want to be comfortable that you are clear about all of the implications of signing the agreement. Make sure that the applicant provides all of the paperwork before you go ahead and make your decision.

Article provided by Mike James, an independent content writer working together with technology-led finance broker Solution Loans, who were consulted over this post.