Monday, 19 May 2014

What does it take to be a Guarantor?

Being a guarantor is something that you may have heard of before, as the idea behind having one has been around for a long time. The re-emergence of guarantor lending since the recession has brought guarantors out into the open again, although they never really went away.

If you have ever rented a home then it’s likely that you would have had to get a guarantor for your rent (this is particularly common for university students or for those who have moved out of home for the first time. It’s also common to ask anyone on a relatively low income to have a guarantor in place). A guarantor is someone who you know well, who is more established than you are financially, who could pay your rent in the event that you don’t, for whatever reason. They would have to sign an agreement committing to this, and it’s likely that they’d be credit checked to confirm that they are who they say they are.

In the distant past, long before telephones or computers and credit checks, if you wanted to borrow money then a guarantor was a staple of the application process. It’s likely that they would act like a ‘sponsor’ and be known to the bank manager. The loan would be paid out on the condition that the guarantor was an upstanding member of society – the bank manager would know their financial situation and would help you out on the basis that they could vouch for you. Back then, status was everything, whereas nowadays the class system has pretty much lost a lot of its former power.

Guarantor loans have emerged again in the years after the recession hit, as all of a sudden access to easy credit has been greatly reduced. Before the financial crash, the banks were happy to lend money to many different people without doing a huge amount of pre-payout checks. This was a good time for the economy in the sense that people were spending money, but unfortunately not all of what was borrowed was making its way back to the banks, as they had agreed to lend out much more than customers could afford to pay back. Now that the banks have tightened their lending criteria, many people have been left out in the cold when it comes to credit, but guarantor loans can now utilise the ‘vouch for’ benefit which featured heavily before the boom years.

If you've been asked to be a guarantor for someone, then you’ll have to fit into set criteria depending on the company your friend/relative is applying to. Usually guarantors need to have a decent credit history, must have enough income to pay back the loan in question (while this is rare, it does sometimes happen) and will ideally trust the borrower to pay back the loan on their own. Many guarantor lenders require the guarantor to be a homeowner, but some lenders do offer tenant guarantor loans at a slightly higher rate of interest. 

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