Guarantor loans are an excellent way for people who, either through past financial mistakes or because don’t have their own record of borrowing, are unable to access loans through any of the mainstream lenders. They provide a way of circumventing the increasingly rigid conditions that banks are placing on credit.
This type of finance is based upon the use of a person other than the applicant – who can be a family member, a close friend or even a colleague at work – to put themselves and their good record up as security to guarantee that the repayment schedule on the loan will be met even in circumstances where the applicant is unable to do so.
Although this form of credit has exploded in popularity over the last two or three years, it is actually based on a much older form of finance. Prior to the dramatic growth of consumer credit in the UK, the major high street banks often insisted on a form of guaranteed repayments for loans issued to younger people or those who had only recently opened accounts.
Guarantor loans have opened up lending to millions of people who would otherwise be shut out, providing access to relatively large sums of money at lower interest rates for loans offered to other parts of the so-called sub-prime credit market. As with any other form of lending, those who are in possession of all the facts and are committed to maintaining a good financial record will benefit the most. It is also particularly true when you are asking somebody else to come forward as a guarantor – ensuring that you play fair and act by the rules will ensure that you don’t risk upsetting a relationship with a friend or family member and force them into making the repayments on your behalf, potentially affecting their good credit record.
For the guarantor
When somebody asks you to guarantee their loan application you are entering into a financial relationship with that person. Their decisions could, if they are reckless or irresponsible, have an effect on your ability to access credit in the future as well as your immediate financial plans. You will want to be reassured that the applicant is committed to making the repayments and that their income and circumstances are unlikely to change throughout the life of the loan.
While potential guarantors might feel some sense of responsibility to help an applicant either through family ties or the bonds of friendship, they should be fully aware of the legally-binding arrangement they are being asked to get into. This is not simply acting as a referee as you would when somebody is in the process of applying for a job or taking out a new tenancy agreement. The guarantor will be obliged to step in when something goes wrong and ensure that the repayment schedule is being met or, in extreme circumstances, have to find the money to repay the loan including interest in full. This is a legal obligation and not one which anybody should enter into lightly.
None of us has control over another person’s spending habits or their willingness or ability to meet ongoing financial commitments. Your first step as a potential guarantor is to make sure that the applicant signs up to full financial disclosure – that means a full breakdown of all of their outgoings including rent or mortgage payments, other credit repayments, food budget, heat and light, entertainment and travel expenses. You will also want to be sure about their ability to repay so will need to see payslips and other proof of income.
Applying for credit may be relatively simple but there are an enormous number of calculations used by lenders in the background. Being a guarantor should be no different – you will want to keep your risk to a minimum. The applicant may enjoy the trappings of success – a good house, nice car and savings in the bank but this may not necessarily mean that they are not susceptible to some form of financial shock at a later date.
As a guarantor, you will want to know that the loan the applicant is seeking is not too large to cause them problems should their income or outgoings change dramatically at a later date.
Ensuring that the applicant plays by the rules will be your major concern and so you may want to consider drafting a written agreement with him or her that ensures ongoing financial transparency. If the applicant is reluctant to do this, you might want to reconsider your offer to avoid greater difficulties and the prospect of a rupture in the relationship once the loan has been taken out.
Both guarantor and applicant will need to be clear about what each is committing to, what the total amount of interest and fees on the loan will be, what circumstances would cause the lender to oblige the applicant to repay the loan, if the guarantor has to put up assets as security and when the guarantor will be released from their obligations on the loan.
The applicant might be a guarantor’s son or daughter and the natural inclination will be to want to help. But this is a hard-headed, financial decision, the ramifications of which may impact upon the guarantor’s financial security. When the borrower does not keep up with repayments, the lender will start chasing the guarantor. When the guarantor does not make good on the amount outstanding, the lender might then start legal action against him or her.
Article provided by Mike James, an independent content writer in the financial sector – working alongside a selection of companies including Solution Loans, a technology-led finance broker with many years experience in advising clients of their most suitable type of credit.