In the UK loan market guarantor loans are becoming more and more popular as time goes on. With non-guarantor products as challenging as ever to get with an imperfect credit score, there remains no real alternative to borrowing £500 to £15,000 at around 50% APR. While this is bad news for those without a guarantor, those who can get a guarantor are able to benefit greatly.
One of the popular reasons to take out this type of loan is to make a large purchase like a car, or to find money for a deposit on rental accommodation; and because these are generally taken out by younger borrowers, they will often turn to their parents to help out and act as guarantor.
A lot of parents will lend the money to their sons and daughters themselves, but what if they don’t have the cash to hand? This is where a guarantor loan can be a life saver; it not only gets the borrower the money they need, but it also allows them to start building a positive credit score for financial independence and additional borrowing down the line.
Acting as a guarantor is not to be taken lightly though.
The Risks of Being a Guarantor
It is worth assessing the risk when not only taking out a guarantor loan, but also acting as guarantor. Fully understanding the responsibilities and risks involved means that problems can be avoided down the line. Problems which could not only have a negative impact on the creditworthiness of the guarantor, but could potentially lead to a breakdown in the relationship between the borrower and the guarantor.
To keep things very simple, the guarantor’s responsibility can be summed up in the following way:
On a guarantor loan, the guarantor becomes responsible for the loan being re-payed if, for whatever reason, the original borrower stops paying back the money they have borrowed.
The guarantor loan experts at Talk Loans discuss this in full with each and every guarantor before they go ahead; making sure they are fully aware of what they are taking on. We asked them for a comment on the risks of acting as a guarantor and they had the following to say:
“Acting as guarantor can be a fantastic way to help out a loved one consolidate their existing debt or make a large purchase, especially if they have been struggling with credit in the past due to unforeseen circumstances.”
“However, it is extremely important the guarantor understands what they are taking on. All of the details are available on the contracts they sign, and guarantors should always be encouraged to ask any questions they may have before signing up.”
“Due to recent FCA regulations the lenders are also carrying out extensive affordability checks on both the borrower and the guarantor to make sure the chance of default is kept to a minimum.”
Ensuring Affordability
As alluded to by Talk Loans, affordability is a big part of any lending decision, but why rely on what the lenders think? It’s worth making sure the loan is affordable personally, before pushing the button.
The guarantor should ask themselves “If my son/daughter stops paying this loan, can I afford to make the repayments until the loan is paid off in full?” If the answer is no, then the guarantor should think twice before acting as guarantor.
A simple way to work out of a loan will be affordable is to look at a bank statement and identify any fixed income and expenditure, therefore working out how much disposable income is available on a monthly basis. This disposable income should then be compared to the monthly loan repayment. If the disposable income is less than the loan repayment, then is the loan actually affordable?
Guarantor Loan Outcomes
There are several different outcomes when taking out a guarantor loan and seeing it through to completion. The first, and the most common, is that the borrower keeps up repayments and everything is great. The second, and the second most common, is that the borrower misses a couple of payments and the guarantor steps in to get everything up-to-date. In some cases the borrower will then pay the guarantor back when they have some spare cash – we hope your son or daughter would do the same!
Another outcome could be the borrower stops paying completely, leaving it up to the guarantor to take full responsibility for the loan. Either making the monthly repayments, or paying the loan off in full in one bulk payment (this would save on interest).
Finally, if the borrower and guarantor both can’t pay the loan back, the account will go into the red and default notices will be served to not only the borrower, but the guarantor as well. The lender will then try many avenues to get the loan repaid by either party.
So, when taking out a guarantor loan, especially as a parent, it is important to understand the full responsibility and plan accordingly.