Guaranteeing any kind of loan can be risky. This applies, in particular, to big loans of up to £15,000.
Still, a lot of people decide to push through to act as guarantor as a favor for their close friends and family members. Before signing on the dotted line it’s important to understand the link between your credit rating and the guarantor loan. You might be surprised that this type of loan isn’t only a factor in your credit rating at the time of application (due to a credit search taking place), but it can also have an impact on your score afterward if things go wrong.
Being a Guarantor Provides No Physical Benefit
One of the critical aspects of being a guarantor is that you take on all credit risks, yet you do not receive the benefit of the loan.
What does this mean? Well in the case of the borrower defaulting on the loan, you continue making payments, but you can’t make any legal claim to what was purchased with the loan, or the money itself. There are cases in which guarantor loan lenders will only accept a guarantor who already owns a home.
The Impact on Credit Rating
It’s vital to understand that if the borrower doesn’t make timely payments, this can reflect on your credit report as well. Some lenders provide a certain timeframe before reporting a default on the credit report of the guarantor. In all cases guarantors will be contacted and given the opportunity to pay before anything is marked on the credit history.
As a guarantor, you may be asked to declare any loans you are guaranteeing when applying for credit yourself, such as a loan or a mortgage. Acting as guarantor may impact your creditworthiness or affordability, which means your application could get rejected or you would only qualify for smaller loans.
It’s also worth being aware that, unlike taking out a personal loan yourself (one of the easiest way to boost your credit rating is to make timely payments), making repayments on the guarantor loan will not really have a positive impact on your credit score. Most lenders will only report negative things on the guarantor’s credit file.
Helping Someone Get a Loan
As mentioned above, there is no real physical advantage to acting as guarantor for your friend or family member. However, there are a number of benefits for your friend or family member. So, if you trust them and care about them it can be a very rewarding experience.
- Help the borrower get access to lower interest rates compared to non-guarantor loans
- Help the borrower get back on their feet financially
- Help the borrower improve their credit history
- Help the borrower regain their financial independence.
At the end of the day to decision of whether or not to act as a guarantor is in your hands. It can be a fantastic thing to do for someone as long as you understand the risks involved and are willing to take the plunge.