Monday, 10 February 2014

The Responsibilities of Being a Guarantor


There are many reasons why someone may get declined for a loan; it may be due to their credit history, age, income, residential status, the list goes on. Being declined can be demoralising, especially if you’re in desperate need of cash. Fortunately though all is not lost, there are now a number of options available that are specifically designed to help those who have been declined by their bank or mainstream lender.

How could guarantor loans help?

The guarantor loan is a unique type of loan that requires the back-up of a third party individual known as the guarantor. There are a lot of myths flying around regarding this type of loan and indeed the responsibilities of being a guarantor. Throughout this article we are going to debunk these myths and reveal the truth about being a guarantor.

The role of the guarantor

It should be emphasized that being a guarantor is a serious commitment, after all your main responsibility is to pay the loan if the borrower is unable to do so. Admittedly, if the borrower is able to keep up with the repayments throughout the loan term the guarantor will never be called on; but this shouldn't be your mind-set.

The lender themselves should always carry out an affordability check on you to ensure that (if you were ever required to do so) you could afford the repayment amount. Despite this, you need to be fully happy and comfortable that the repayments of the loan wouldn't ever impact your finances in a negative way.

Your relationship with the applicant

It is important that you have a good relationship with the applicant and you have a strong understanding of each other’s financial situation. As guarantor you should be clear regarding why the applicant needs the loan, what they are going to use the money for and how they plan to repay it. If you feel that the applicant is taken out the loan for a reason that they shouldn't (e.g. a spending splurge or an unnecessary expense) then don’t stand as guarantor.

If you do decide to stand as guarantor then you need to remain in constant contact with the applicant. Let them know that if they are having any problems they should contact you first rather than simply allowing the loan to fall into arrears. The last thing you want is to have a call from the lender requesting immediate payment.

Will it affect your credit?

Being a guarantor will not affect your credit history, the only way your credit history could be affected is if both you and the applicant fail to make the payment and a missed payment is reported to the credit reference agency. Consistent missed payment or failure to contact the lender could result in defaults or court orders which will dramatically impact your ability to get credit in the future.

To conclude

If you have been asked to be a guarantor then there are a number of factors that you need to take into consideration. Firstly, do you trust the applicant to keep up with the repayments? Secondly, could you comfortably afford the repayments if you were required to make them? And finally, if you fail to make the repayments are you aware of the impact that it could have on your finances?

Providing you can confidently answer these questions with ‘yes’ then being a guarantor shouldn't cause any problems for you, and could help your friend or family member to get the finance they need.

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