Becoming someone’s guarantor can be life-changing to them – it could help buy them their first home, get a car on finance or many other monumental life achievements. However, there are considerations a person should take into account first before they sign on the dotted line.
A friend or relative may request for you to become their guarantor for a variety of reasons. It could be that they simply haven’t built up their credit history yet, therefore need some help for their first big purchase. For some people, however, it could be that they have a poor credit rating – in which case, there are a number of questions to ask yourself. From ‘can you trust the person you’re becoming a guarantor for?’ to ‘what will you be responsible for?’, in this post, we’re highlighting the all-important questions.
What is a guarantor?
First thing’s first, we’ll quickly cover exactly what it means to be a guarantor so you don’t have to go looking elsewhere.
Becoming someone’s guarantor means you are guaranteeing to their lender or contract holder that you will repay the money they owe in the event of them not being able to meet the repayments – it’s as simple as that.
What is a guarantor responsible for?
A guarantor is responsible for meeting any payments the borrower hasn’t been able to make. Before the lender contacts you to take payment, they will often contact the borrower to offer some kind of payment plan before the guarantor is forced to take responsibility. However, this may not always be the case, so it’s best to check first.
Can you trust them to pay the loan back?
You need to consider how well you know the person you are acting as a guarantor on behalf of to ensure you trust them to repay their loan. If they’ve asked you to be their guarantor, then you’re within your rights to ask them why they need one. If they have defaulted previous payments and have a bad credit score as a result, is there a chance they will do this again and leave you with the responsibility?
Another thing to think about is how good your relationship is with the borrower. If you think there is the potential for this loan to ruin a friendship, then perhaps it’s not a good idea to become a guarantor for them.
Can you afford to pay back their loan in the event of them not paying?
One of the most important things to consider when becoming a guarantor is that, in the event the person you’re helping defaults on a payment, can you actually afford the payment which will automatically come to you? You may be without a couple of hundred pounds one month if you end up having to cover the cost.
Before agreeing to anything, find out exactly how much the monthly payment is and consider whether this can be worked in to your monthly budget. If you don’t have the disposable income to cover the cost for them, do you have a savings account where the money could come from? If you don’t think it’s likely that you’d be able to cover the cost, then it’s in your best interest not to become the guarantor. The last thing you want to do is get in a situation where you end up losing valuable assets due to neither of you being able to afford repayments.
Further to this, consider whether, in the circumstances of you having to cover a payment, the borrower will be able to pay you back and afford the next payment due.
Do you have a lump sum you can lend them instead?
Sometimes, becoming a guarantor isn’t always the best solution. If you have a good enough relationship with the person asking you to become a guarantor, then you might want to consider another option – if you have a lump sum of money that you’re not putting to use, could you either gift or loan them this money instead?
Now of course, if they were asking you to be a guarantor on a mortgage, then you would have to gift them the money – this means they don’t legally have to pay this back to you, as you’ve signed a gift declaration form. If you’re not giving it to them as a gift, then you won’t be able to lend the money for a mortgage. However, if the funds were being used to pay off another loan or to buy a car instead of getting it on finance, then supplying them with the money instead of becoming the guarantor could be a viable option.
Do you know what you’re becoming a guarantor for?
As mentioned above, there are a number of different reasons someone might be applying for a loan or finance. It could be to rent a property, get a mortgage on a property or buy their first car. However, before you agree to guarantee their loan, consider whether it’s for a non-urgent purchase or a necessity.
For example, if it’s so they can get a premium branded car with a high price tag instead of a reasonably priced one, the borrower could save money to purchase this on their own. Becoming a guarantor so the borrower can live somewhere, on the other hand, is a far more important necessity. Subsequently, evaluate what you’re helping them with before agreeing to anything.
We hope that some of these questions we’ve highlighted have helped you make the decision of whether you want to become a guarantor or not. If you would like to learn more about guarantor loans, then check out our page with all the information you need.