Pros And Cons To Consider Before Agreeing To Be A Guarantor

For time immemorial, we have been taught to go out of our way to help out family and friends. A modern way of helping the family in need is to be their guarantor. But with the emotions and ingrained traits, we often fail to understand the responsibilities that come with being a guarantor.

It is always advised to make an informed financial decision, and while you may not be shelling out money from your pocket immediately and it may seem like a safe bet, you might want to reconsider.

Being a guarantor is essentially a way of assuring the loan provider that the borrower will repay the entire amount as scheduled. This may seem like an easy thing to do for someone you have known for a long time, it is essential to know that in case the borrower defaults, your credit ratings might be affected as well.

This article discusses the various aspects of being a guarantor.

Criteria Of Becoming A Guarantor

There are different criteria for being a guarantor in the UK. Most lenders accept guarantors to be over 18 years of age with a good credit score and do not accept guarantors who are not based in the UK. Certain lenders may require the guarantor to be at least 21 years old.

The lender will also perform a credit check on you. While it is obvious to wonder, “why would the lender check my credit rating?” However, it is important for the lender to have the assurance that you have a clean credit history. You can only be a guarantor if you have a spotless credit rating yourself.

Responsibilities Of A Guarantor

As a guarantor, you will be required to step in and take over the obligations that have been agreed between the lender and the borrower. Some loans even require the guarantors to make payments if the borrower cannot do it themselves.

Not only loans, sometimes even rent agreements require guarantors. In cases where the tenants cannot pay the rent because they have a very low income or a bad credit score, they might be required to present a guarantor who can pay the rent or other penalties to the landlord.

Pros Of Becoming A Guarantor

Satisfaction

It is very satisfying to be there for your family members in times of need. Therefore, you can evaluate the risks associated with the agreement to check whether the borrower has a good repayment plan in place.

In such cases, you can safely go ahead and accept being a guarantor just for the satisfaction of it. However, if you see any red flags, this should not be your sole criteria for agreement.

Flexibility

Another benefit of being a guarantor is that you can choose to limit the size of the guarantee and minimise the risk for yourself. Since you are allowed to be liable for only a certain portion of the loan, the lender bears the risk for loan amounts above the opted limit. This reduces the strain on you in case the borrower is unable to repay the loan.

Cons of Becoming a Guarantor

Legal Contract

Becoming a guarantor means you are entering a legal contract with the lender or landlord for a specific amount of time. It also means that you agree to bear the repercussions on behalf of the borrower.

In case the borrower is unable to repay their loaned amount, you are legally entitled to pay them instead. If you do not refund the borrowed amount and default on the guarantee, you can have some legal trouble on your hands.

Credit Rating

We all know the importance of credit rating. Maintaining a good credit rating is essential to get loans, tenancy contracts and even houses. If you worked hard to ensure a good credit rating, you would not want to diminish it due to someone else’s inability to pay their debt.

Your credit score will be unaffected if the borrower repays their debt quickly. But unfortunately, it will be damaged if both the borrower as well as you cannot repay the loan within the specified time.

Sometimes, guarantors are required to surrender the title and deeds of their houses to the lender or landlord. In such an unlikely event, you may not be able to use it as security for any loans of your own.

Impact On The Relationship

Being a guarantor is a stressful job, and the stress of it could hamper your relations with the borrower. Two scenarios can occur. Firstly, the burden of having to pay someone else’s debts could ruin your personal relationships.

Secondly, if your relationship with the borrower breaks down, you cannot wriggle out of the responsibility of being their guarantor. Even after an irreparable falling out, you will be liable for the borrower’s debts if they are unable to make the repayments.

What Should You Do Next?

First, go ahead and pat yourself on the back for being financially secure enough to provide others with the security net to become independent. Having said that, while it is a personal decision whether you want to become a guarantor or not, you should not base it on emotions but rational arguments.

There are both pros and cons of being a guarantor. You should weigh them out while making the decision. However, if you are still in a dilemma, you should consider approaching the borrower and asking them to reconsider their option of borrowing the money or undertaking the tenancy.

For example, you could suggest payday loans for bad credit. These are high-cost, short-term loans designed to support people with poor credit history in overcoming financial emergencies.

Conclusion

Often people neglect the fact that being a guarantor is a legally binding contract which cannot be broken unless the tenure is over. If both the borrower and you fail to repay the loan or rent, the lender or landlord can file a legal case against you even though you were not the primary party. Therefore, this decision should not be made on a whim.

Furthermore, this decision could also impact your credit rating. The borrower’s inability to repay their rent or mortgage should not hamper your hard-earned credit ranking. Unfortunately, if that is the case, it is better to think twice before you agree to become a guarantor.