You are legally obliged to pay the loan back on behalf of the main borrower if they default on the guarantor loan. This is why you should always make sure you have fully understood the potential implications of becoming one when signing a loan agreement.
However, you will not need to do anything if the main borrower pays back the loan. You will only need to pay money in the event that the main applicant falls into financial difficulty and can’t pay the loan back, or simply chooses not to.
What does being a guarantor involve?
The biggest potential responsibility you will have is paying the loan back. Other aspects involved in the guarantor loan process include:
- Co-signing the loan contract during the application process. This will be done electronically with most guarantor lenders.
- A credit check carried out on you to ensure you can be a guarantor based on financial history.
- Receiving the funds into your bank account
Can I choose to no longer be a guarantor?
No, after the initial two-week cooling-off period has passed (when the loan contract was signed and funds transferred) you cannot change your mind.
This is because the loan is largely approved on the basis of the guarantor’s creditworthiness, and not the main borrower’s.
In most cases, the main borrower is applying for a guarantor loan as they are unlikely to be accepted through a traditional lender. This may be due to a bad credit score, no credit history at all, or a lack of stable income.
Consequently, it is not possible for the guarantor to change their mind, as it is likely this will change the terms of the loan and may lead to a higher level of risk for the lender.
What happens if the guarantor does not pay back the loan?
If you and the main borrower for the loan default on loan repayments, this can affect your credit score.
If your credit score is impacted this can have a number of implications, such as making it more difficult for you to get access to other kinds of credit in the future.
Things to consider before becoming a guarantor
- Your relationship with the applicant
- The applicant’s trustworthiness
- Alternatives to a guarantor loan
- Willingness to pay the loan back
It is strongly recommended that you only become a guarantor for someone you have a good relationship with that is long-lasting.
You need to make sure that it is someone whose financial position you understand as well as their reasons for getting the loan.
Trust will be an important factor when it comes to deciding to become a guarantor too. Things to take into account include:
- Do you trust the main applicant to be financially responsible enough to pay back the loan themselves?
- Have they shown commitment to paying back the loan?
- Have they demonstrated their creditworthiness?
You should also make sure that a guarantor loan is necessary in the first place. For example, is the loan simply to buy a non-urgent purchase like a new car, a holiday or a piece a jewellery? Alternatives should be considered for things like these – such as selling unwanted items or saving money, instead of a guarantor loan.
Of course, a hugely important factor to consider is your willingness to make repayments on the guarantor loan. You need to be honest with yourself about this, and consider the financial implications of doing so, should it occur.