Being a guarantor can seem like a noble act, helping a friend or family member secure credit. However, it’s crucial to understand the potential downsides before you commit. Acting as a guarantor means you promise to repay someone else’s loan or mortgage if they default, a responsibility that carries significant financial and personal risks.
Why Might Someone Need a Guarantor?
Borrowers usually need a guarantor for several reasons:
- Lack of credit history: Young individuals or newcomers to the country often have no credit history.
- New job: Recently employed individuals may not yet have a stable financial record.
- Low salary or credit score: Those with lower income or poor credit may struggle to get approved for loans on their own.
This need can arise for various types of credit, such as rental properties, loans, car finance, or mortgages.
Financial Risks of Being a Guarantor
The most obvious risk is the financial burden. If the borrower defaults, you are legally obligated to repay the debt. This responsibility can lead to severe financial strain and even risk your own assets, such as your home. Here are some key considerations:
- Payment Responsibility: If the borrower fails to make repayments, the onus falls on you. This can damage your credit score if you cannot cover the payments.
- Relationship Strain: Financial issues can strain personal relationships, potentially leading to family feuds or ending friendships.
- Legal Obligations: Once you sign a loan agreement as a guarantor, it is challenging to be released from this responsibility. Lenders rely on your creditworthiness to approve the loan.
- Also Read: How to archive emails in Outlook
Impact on Your Credit Score
While the act of becoming a guarantor doesn’t directly appear on your credit report, it can still affect your credit in several ways:
- Financial Association: Your credit report may show a financial association with the borrower, which lenders can view when assessing your applications.
- Potential Defaults: If the borrower defaults and you cannot cover the payments, this negative information will be recorded on your credit report.
Future Borrowing Implications
Being a guarantor can impact your ability to secure future loans or mortgages. Lenders consider all your financial commitments when assessing your creditworthiness. The potential liability of covering someone else’s debt can make you a less attractive candidate for new credit.
Considerations Before Becoming a Guarantor
Before agreeing to be a guarantor, ask yourself:
- Trust and Responsibility: Do you trust the borrower to make repayments? Are they responsible with their finances?
- Financial Capability: Can you afford to repay the loan if the borrower defaults?
- Relationship Impact: How would covering their repayments affect your relationship?
Exiting as a Guarantor
While you might not be tied to the entire mortgage term, removing yourself as a guarantor isn’t straightforward. Typically, the borrower must refinance or build enough equity to release you from the agreement. For loans, once signed, you generally can’t exit the agreement unless the loan is paid off or refinanced without you.
Earnings and Credit Checks
Lenders perform credit and affordability checks on guarantors to ensure they can cover the loan repayments if necessary. There’s no fixed income requirement, but having a stable, sufficient income or assets like property is essential to satisfy the lender’s criteria.
