If you’re thinking of taking out a loan or mortgage, you may have come across the term ‘guarantor’ and wondered what it meant. Put simply, a guarantor is a person who agrees to take responsibility for repaying a debt if the person who took out the loan (the borrower) stops paying. By acting as a guarantor, this person essentially vouches for the borrower’s ability to repay the loan.
However, being a guarantor is not without its many risks. For example, if the borrower stops paying at any point, the guarantor becomes liable for the debt and their credit rating might be negatively affected as a result.
What is a guarantor?
A guarantor is an individual who agrees to be responsible for a loan you take out in the event you can no longer continue to make your agreed-upon payments. If you’re a guarantor for someone, you will be contractually liable for someone else’s debt if they can’t pay it.
When you agree to become a guarantor, you will sign a document with a witness present to confirm that you are willing to be responsible for another person’s loan or debt repayments. The agreement sets out the guarantor’s legal obligations in great detail.
Some of the most common products that might require a guarantor include tenancy agreements, mortgages, and loans. This is because these products usually require you to repay a large sum of money over a prolonged period.
In any instance, a guarantor’s liability cannot exceed that of the tenant.
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Why do people use a guarantor?
People use guarantors for a variety of reasons. One of the most common reasons is that they have a poor credit rating or no credit history and therefore cannot secure a loan, mortgage or rental property on their own. In this situation, a guarantor with a stronger credit history can help reassure the lender that the borrower will be able to maintain their payments.
Another reason for needing a guarantor is when the borrower is taking out a loan or mortgage for a larger amount than they can reasonably afford to repay on their own. The guarantor can then help to bridge the gap between the borrower’s income and the remaining amount on the loan or mortgage.
Sometimes, lenders might require a guarantor as a condition of the loan or mortgage agreement. This is especially common for younger borrowers or those without a stable source of income. In these cases, the guarantor is typically a family member or close friend who knows the borrower well and is willing to vouch for them if they experience financial difficulties.
What types of arrangements might benefit from a guarantor agreement?
There are several types of arrangements that may benefit from a guarantor agreement. Some popular examples are listed below:
Mortgage
One of the most common agreements that uses a guarantor is a mortgage.
In this situation, a guarantor mortgage can be used to help a borrower get approved for a home loan that they may not otherwise qualify for on their own due to having a poor credit score or limited credit history.
Tenancy agreement
Another arrangement that might benefit from a guarantor is a tenancy agreement, particularly for landlords who are renting to individuals for the first time.
In this case, a joint tenancy agreement and separate bank accounts might be used to ensure that monthly rent payments are made on time. The guarantor can also be used to cover any unpaid rent payments and rent increases if necessary.
If you live with other tenants under one tenancy agreement and you are joint and severally liable for the full amount, it’s common for the guarantor agreement to cover all the rent for the entire duration of the fixed-term tenancy, not just one tenant’s rent or for a limited period.
Loan agreement
Lastly, a guarantor may be used for a loan agreement if the borrower is self-employed. The use of a guarantor might increase the likelihood of approval and help to secure a more favourable interest rate than if they were to apply on their own.
However, it’s important for both the borrower and the guarantor to understand the risks involved and to carefully review the terms of the guarantee agreement, particularly in the event of a default.
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Can anyone be a guarantor?
It might be tempting to appoint a close friend or family member as a guarantor in the hopes that it means you can automatically qualify for a better deal on a loan or a mortgage. In most cases, a guarantor is someone you have a close relationship with but have a separate bank account to, such as a parent or spouse.
However, a guarantor must be someone who trusts you and would be willing to cover your repayments in the event that you default.
Generally, a guarantor must be a UK resident, over 21 years old, have a good credit history, and have a high enough income to cover missed payments. Most letting agents also state that a guarantor needs to be a homeowner.
There are many considerations you should be aware of before appointing a guarantor. Remember, they will be held liable for the debt if you fall behind on your payments. This can place a significant financial burden on them and in turn cause a rift in your relationship.
Can you be a guarantor if you have a low credit score or a bad credit history?
While having a good credit history can increase the likelihood of being accepted as a guarantor, it might still be possible to act as a guarantor with a poor credit history. However, this will depend on the individual requirements of the lender and the severity of their credit issues.
For example, if a potential guarantor has a poor credit history, the lender might ask for another form of security in the form of a larger deposit, proof of savings or assets, or even another guarantor with a better credit rating to bridge the gap.
The guarantor should also carefully consider their own financial situation before agreeing to be a guarantor for someone else, especially if they have any outstanding debts or financial commitments themselves.
Usually, the lender will conduct a credit check on the guarantor in the same way that they would on the borrower to assess their financial situation and determine their creditworthiness. If the guarantor has a poor credit history and the lender still decides to proceed with the agreement, the guarantor will likely face higher interest rates and stricter terms.
Does being a guarantor affect my credit history?
As a guarantor, your credit history can be affected if the borrower defaults on the credit agreement. For example, if the borrower misses payments, this will show up on your credit report and have a negative impact on your credit rating.
If the debt falls to you to repay, this can also affect your credit history. The lender might then pursue legal action against you to recover the debt, which can result in a County Court Judgment (CCJ) or other legal action being taken against you.
These actions can have a detrimental impact on your credit rating and can make it harder for you to obtain credit for several years. Before agreeing to act as a guarantor, it’s important to carefully consider your own financial situation and ability to take on the associated risks.
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Does being a guarantor affect my mortgage?
The short answer is yes. If you choose to act as a guarantor, it could affect any future mortgage applications you make. When applying for a mortgage, lenders typically review your credit history and financial situation to assess your ability to make repayments for the length of the arrangement.
If you have acted as a guarantor in the past and you have had to repay someone else’s debt, this could potentially make it more difficult to obtain a mortgage. In this situation, most lenders will view you as a high-risk borrower and may offer you less favourable terms or higher interest rates as a result.
However, if you have been involved in guarantor mortgages in the past and the borrower has made all their repayments on time, this may have a positive impact on your credit history and might actually improve your chances of obtaining a mortgage.
What happens if there’s a disagreement in the guarantor agreement?
If a lender tries to enforce a guarantor agreement that includes an ‘unfair term’, the guarantor will ask the court whether or not it is unfair. If the court agrees that it is unfair, it has no effect in law.
The court will usually review the individual circumstances of the case and check for any unfair contract terms that might create a ‘significant imbalance’ between both parties. It will then decide whether or not the guarantor needs to pay.
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Conclusion
Being a guarantor is a significant financial responsibility. In the event the borrower can no longer afford a credit agreement, the guarantor will be contacted to pay the balance and will remain liable for the debt until it has been repaid.
If someone has asked you to be a guarantor, it might be a good idea to encourage them to compare several different lenders to ensure they are getting the best possible deal for their circumstances.
In most cases, a lender will check the credit of both the borrower and guarantor to ensure they’re financially stable enough to enter into a credit agreement.
