Being a Guarantor - What are the dangers?
Personal Loans - Being a Guarantor
Have you ever been asked to be a “guarantor” for someone else’s loan? Often it is a partner or relative who asks, but these days it can also be a friend or work colleague. Basically a lender will ask for a guarantor because they are not completely comfortable with lending the money to the applicant, so they want another person involved to make the deal more solid. For example, if you were to apply for a loan but had only been in your job for three months, had also moved recently and did not have many assets to your name, the lender may feel you don’t have a strong enough application. Consequently, your next option may be to ask someone to be a guarantor. So what are the risks to the guarantor? Let’s look at three major events that you must be aware of if you are considering being one.
1. You may be restricted in the future when you want to borrow money
Generally, when you apply to borrow money, you must complete an assets and liability statement. As a guarantor for someone else’s loan, you are actually responsible for making the repayments if the borrower can’t. Consequently, when you fill out your liability statement you must include the debt you are guarantor for, as you could be called up at anytime to make the repayments. Consequently, this means the bank or lender will allocate some of your income to repaying that debt, because it is a potential responsibility of yours. The end result is that the amount you may want to borrow could be declined, because the lender has calculated that you can’t afford the repayments on both loans if required to.
2. You may be called upon to make the repayments and if you don't, risk a bad credit rating
If the person you are acting as a guarantor for suddenly loses their job or just can’t make the loan repayments, guess what? You are now legally responsible for helping out as you guaranteed the lender you would assist. If you don’t help, the loan will go into arrears, whatever the asset used for the loan could be repossessed, and you eventually could end up with a default listing on your credit report. What does this mean? Well, next time you want to borrow money, you will struggle to borrow with any mainstream lender, as they generally do not lend to applicants with a bad credit record.
3. You may fall out with the person, but still be legally tied to the loan
It’s not a nice thought, but sadly it does happen. Friends, colleagues, even family can, for whatever reason, have a major fall out and no longer wish to be associated with each other. So what happens to the loan? If you are the guarantor, you can approach the lender and ask to be removed, but depending how much of the loan has been repaid, they may legally say “no”. This means you are still tied to commitment. If you refuse to assist if called upon, then point 2 above will apply and your credit rating could be affected badly. So you may be asking yourself, “Well, why on earth does anyone become a guarantor?” Parents are probably the most common guarantors, followed by partners/spouses. Parents generally have 100% faith in their children’s ethics and morals, as do partners, so therefore the guarantor foresees no real risk. Unfortunately though, children and partners can have fall outs too. Now, don’t get us wrong, we are not opposed to being a guarantor, but we are very committed in educating everyone on the possible dangers of being one. Millions of guaranteed loans go full term without any incident or need to call on the guarantor, which is exactly what all guarantors hope for. We just recommend you give it great consideration and thought, talk to professionals if you feel uneasy, and never feel pressured into becoming a guarantor.
What happens if it does go pear shaped and your credit report is affected?
As mentioned earlier, it will mean that when you want to borrow money or obtain any form of credit, you will find it more difficult. Understandably, there are many situations where this has happened and the guarantor feels wronged, but the banks are generally able to lend due to their strict lending policies. Fortunately lenders like us, Fair Go Finance, recognize that unfair things happen in life and people should still be able to borrow money. If you do have bad credit, we are capable of considering your situation and assist many customers who have a bad credit report.
Find out more about our Bad Credit Loans.
Remember, at Fair Go Finance we are here to give you a Fair Go!