Credit Score Basics > What does being a guarantor involve?

What does being a guarantor involve?

Wollit Team3 minute read · Updated 2nd July 2024

If you’re about to ask a friend to be a guarantor for your loan or mortgage, you need to know that they’re about to take on significant financial responsibility and risk by agreeing to repay your debt if you cannot. Here is what it involves.

What is a guarantor?

A guarantor is someone who agrees to repay the debt if the main borrower cannot make the payments.

This reduces the risk for the lender and for you, but of course, it comes with a few risks for the guarantor.

Who can be a guarantor?

To be a guarantor, your friend must be over 21 years old, have a good credit history, and have a permanent UK address.

Some lenders may also require the guarantor to be a homeowner or have a certain amount of equity in their home.

Also – and this is very important – the guarantor must also be financially independent from you.

Why is having a guarantor useful for me?

A guarantor can help you get a “guarantor loan,” a type of personal loan in which a friend or family member agrees to make the repayments if the borrower cannot.

The lender assesses the creditworthiness of both the borrower and guarantor. If approved, the loan amount is paid into the guarantor’s account, which helps protect against fraud. The guarantor is then responsible for transferring the money to the borrower.

The borrower then makes the monthly repayments directly to the lender. If they miss a payment, both the borrower and guarantor are notified.

However, the guarantor is expected to make that payment if the borrower fails.

Why is being a guarantor risky for them?

Being a guarantor is a serious commitment and comes with significant risks.

If the borrower misses payments, the guarantor is legally obligated to make those payments.

Failure by the guarantor can hurt their credit score and financial situation. They’re fully liable for the debt, just as if they borrowed it themselves.

In the worst-case scenario, if neither the borrower nor the guarantor can repay, the lender may pursue legal action or seek to recover the debt from the guarantor’s assets. This could lead to the guarantor’s home being repossessed.

This is why it’s crucial for guarantors to consider the risk carefully and only agree to the loan if they are confident the borrower will make the repayments.

The guarantor should also ensure they can afford to make the repayments themselves if needed.

A guarantor can usually be released from their obligation once the primary borrower has built up sufficient credit history or equity in the property (in the case of a mortgage).

However, they are still bound by the terms of the original agreement until the lender agrees to change it.

Will being a guarantor affect their credit score?

Being a guarantor does not directly impact your friend’s credit score, but if they have to repay the loan instead of you, then this will be recorded on their credit file.

If they fail, this will also impact their credit score—it’s the same as if they missed a payment on one of their existing credit agreements.

To make matters worse, lenders may also be less willing to lend to them in the future if they see they have had to make payments as guarantors.

Can I have more than one guarantor?

Very rarely. Some lenders may allow multiple guarantors, but this is uncommon.

Most lenders prefer a single guarantor who has a credit score that is strong enough and enough income to cover the repayments alone.

What happens if my guarantor dies or becomes bankrupt?

You’ll still be liable for the full outstanding balance if the guarantor dies or becomes bankrupt during your loan term. However, if you can’t pay, the lender may seek to recover the debt from the guarantor’s inheritance estate or assets.

Can I remove my guarantor during the loan term?

Not easily. Removing a guarantor is quite hard and depends on the lender’s policies.

Some may allow it if you have built up sufficient credit history or equity in the property (if it’s a mortgage).

However, the guarantor remains liable until the lender agrees to release them.

What alternatives do I have if I can’t get a guarantor?

If you don’t want to jeopardize your relationships, even if you can get a guarantor, you might want to ask them to help you in ways that are safer for them, like becoming a joint borrower or even lending you money directly.

This way, you can maintain your relationship if things go south.

However, improving your credit history and score is the best solution.

One way to do this is to download a credit-building app like Wollit. Wollit reports your fixed-fee monthly subscription as a loan repayment to the credit reference agencies (Experian, Equifax, and TransUnion).

This helps you improve your credit history by showing that you can pay debt on time, one of the main factors influencing your credit score.

On top of this, Wollit can also report your monthly rent payment to Experian, adding another line in your credit report that shows lenders you’re responsible and pay your bills on time. Eventually, this will help you get the loans you want on the terms you want, guarantor or no guarantor.