Somebody you know has just asked you to be a guarantor for a loan that they want to apply for? You might not know anything about guarantor loans or are simply looking for some further advice about the process. Either way, this guide is for you – to help explain what is still a relatively young sector of the lending market.
What are they?
Guarantor loans are a form of personal lending in which a third party agrees to provide the security for a loan that another person is taking out. By signing the loan agreement, the third party agrees to meet the repayments or settle the loan in its entirety should the borrower fail to keep up with the schedule or default on it.
They are similar to loans that were issued by high street banks in the days before the credit market opened up in the UK. Before the advent of credit checks, a bank manager would often ask an applicant to propose somebody to guarantee a loan or mortgage.
Who can be a guarantor?
Almost any adult can become a guarantor. The person acting as security must be between aged 18 or over with the upper-age limit in the mid 70s at the start of the loan term and must be able to demonstrate that they will be able to afford the repayments should the applicant fail to make them. They can be employed, self-employed and even retired so long as they can prove that they have enough income to cover the loan repayments.
While many lenders only offer loans when the guarantor is a homeowner, others are happy to accept applications with the guarantor being a tenant. The main differences between the two are the interest rates offered – where the guarantor is a homeowner, the applicant will usually benefit from lower interest rates and higher loan amounts.
If you live in Scotland, then both the guarantor and the applicant must live north of the border.
Most lenders will insist that the guarantor has a good or reasonably good credit history.
A guarantor can be a friend, a family member or a work colleague of the applicant. Individuals who already have a financial relationship with the applicant – a husband or wife, for instance – cannot be guarantors.
What is the process?
Obviously the main risk to somebody if they agree to be a loan guarantor comes in the instance that the borrower stops making the repayments. Compared with the number of guarantor loans that have been made in the last few years, the instances of default are relatively low, however.
Nevertheless, it is not unreasonable for a potential guarantor to ask the applicant for a full breakdown of his or her income and outgoings to ensure that the guarantor is confident that the person they are helping will be capable of repaying the entire loan. Becoming a guarantor is not an undertaking that should be entered into lightly. That person needs to be certain that the borrower will make the repayments on time and that, in exceptional circumstances, he or she will be happy to step in to repay the loan.
A potential guarantor should not agree to go ahead without being clear on this point. Financial commitments between friends or family members can and do have an effect on relationships – it is important that the guarantor has complete confidence in the borrower.
Before going ahead, a guarantor should ask themselves the following questions:
- Do they know the person applying for the loan well enough to be able to trust that they will be able to make the loan repayments on time every month?
- Are they confident of the applicant’s general financial wellbeing? Are they happy to show their pay-slips and their bank statements when asked?
- Would they be happy to lend money to the applicant if asked to do so. If the answer to this question is ‘no’, then it might be prudent not to volunteer as a guarantor.
Once a guarantor has satisfied themselves that the applicant will be able to meet the repayments, then they will have to log on to the lender’s website to complete the application process. The lender will ask the guarantor for approval to conduct a credit check on them.
Once the loan has been approved, the money will, in many circumstances, be paid directly into the guarantor’s bank account, rather than the applicant’s. This is a means of preventing fraud and to give the guarantor the option to change their mind during the cooling off period before the money is handed over to the applicant.
Both the applicant and the guarantor will then be sent copies of the loan agreement with the repayment schedule. The guarantor will receive statements in the same way that the applicant does, giving them the opportunity to check the amount of loan still outstanding, the monthly repayments and the interest rates. Most providers provide a means for guarantors to update their details online securely.
What happens if the borrower is late with a repayment?
In the unfortunate circumstance where the borrower misses a payment or is seriously late with one, the loan provider will generally make strenuous efforts to give them the opportunity to bring the loan back up to date. The guarantor will, however, be kept informed of this.
If the borrower still does not bring the loan back up to date – usually after two weeks have elapsed – the loan company will contact the guarantor again and collect the repayment from them.