When you apply for a loan or make money agreements, you may hear about having a guarantor. What is a guarantor? A guarantor is a person who promises to repay the loan if you can’t make the payments.
Having a guarantor can help you get approved for credit. But you need to fully understand their role and risks before signing them up.
If you have poor credit or little history, a guarantor can help get loan approval. But you and the guarantor must fully understand the obligations.
A guaranteed loan approval shifts your repayment ability from relying on the guarantor. If you default, the guarantor is fully responsible. Their good credit could take a significant hit.
So, think carefully before asking someone to be a guarantor. Make prudent choices to protect both of you.
What is a Guarantor?
A guarantor is a person who agrees to pay back a loan or debt if the primary borrower fails to repay as promised. The guarantor signs a legal contract with the lender, making them equally responsible for the unpaid balance. This gives the lender extra security.
Guarantors are often required for loans when the borrower has higher risk. For example, young adults with limited credit history may need their parents to be guarantors on student loans or apartment leases. New business owners often need personal guarantors for startup financing. People with low credit scores may also need guarantors to cosign auto loans, mortgages, and other credit.
The guarantor’s good credit and money history help make up for the borrower’s perceived riskiness and lack of creditworthiness. This improves the chances of getting approved and often allows better loan terms.
Understanding Guaranteed Loan Approval
If you have poor credit or little credit history, a guarantor with strong finances can open doors to loans you may not otherwise qualify for. However, it’s important that you and the guarantor fully understand the legal responsibilities involved.
Before agreeing to be a guarantor, a person should honestly assess if they can take over complete loan repayments long-term if needed. They should first review their budget, savings, income stability, and finances.
Meanwhile, the main borrower shouldn’t view guaranteed approval as a free pass to take on debt loosely. Be realistic about the loan amounts you genuinely need and can manage. Maintain good communication with the guarantor and hold up your end of the deal.
Types of Guarantor Agreements
A guarantor promises to repay a loan or debt if the main borrower does not. Guarantors are used for loans, apartment leases, mortgages, and more. The guarantor’s duties can vary for these agreements.
Loans
For personal loans, online direct lender loans, credit card loans, car loans, and student loans, a guarantor may be required if the applicant has poor credit or income. By signing the loan contract, the guarantor agrees to pay if the borrower defaults. With loans, the guarantor commits to paying the unpaid balance.
Leases
Landlords may require a guarantor when renting to risky tenants, like students or low-income applicants. The guarantor signs the lease. They promise to cover unpaid rent or damages if the tenant defaults. Unlike loans, the guarantor’s duty ends when the lease ends.
Mortgages
Some lenders require a guarantor for mortgages. This applies if the borrower cannot provide a 20% down payment. A guarantor’s income and assets help borrowers qualify. If default happens, the guarantor must pay the mortgage balance.
The guarantor’s duties differ between rental, mortgage, and loan contracts. However, large financial risks always exist for the guarantor. This applies if the primary borrower fails to uphold the agreement.
When a Guarantor is Needed?
Situations like poor credit, low income, or little credit history concern lenders. Adding a guarantor can increase approval chances for these high-risk applications.
Poor Credit History
Guarantors may be required if you have a low credit score from past issues. The guarantor’s stronger history reduces risk concerns.
First-Time Borrowers
Young adults often cannot qualify for major loans alone. College students frequently need parents as guarantors for private student loans and housing leases.
Low Income
Applicants with low incomes may not meet debt-to-income requirements. A guarantor with a higher income helps offset income concerns.
A guarantor helps when your situation prevents financing. Their profile helps borrowers with poor credit, income, or credit history.
Choosing the Right Guarantor
Picking an appropriate guarantor requires careful thought. The right person can be helpful. The wrong choice burdens someone who is unable to handle the responsibility.
Good Credit
The guarantor should show financial responsibility with few late payments or unpaid debts. Excellent credit gets the borrower better loan terms.
Income and Assets
Ideally, a guarantor has a steady income. And can handle potential repayment obligations. Substantial savings and assets provide assurance.
Relationship Stability
Choose only guarantors with whom you have a stable relationship. Avoid pressuring reluctant people. A guarantor must fully accept the risks they take. Any relationship strain could impact willingness to meet obligations.
A suitable guarantor can mean loan approval or rejection. Pick someone responsible and financially established. Avoid choices that unduly burden loved ones. Get transparent input. Communicate openly.
Risks
Being a guarantor involves major financial risks that require careful thought. If the primary borrower fails to repay, the guarantor becomes legally responsible for the outstanding debt.
Before agreeing to be a guarantor, honestly consider your own finances. Do you have a stable income and strong savings to take over repayments for an extended time if needed? Review the loan terms – are you comfortable with the total amounts and interest rates? Understand how long the commitment would last.
Also, know a guarantor’s responsibilities are not discharged in bankruptcy. And you likely won’t be able to remove yourself easily from the contract if the relationship sours. Think twice before cosigning for casual acquaintances or out of pressure.
Offer this help only for those closest to you and for amounts you can realistically take over. A prudent guarantor commitment benefits both parties.
Conclusion
Move carefully and avoid overburdening a guarantor out of desperation or hurry. Take time to find lenders willing to work with you. Compare all options thoroughly. Seek advisor guidance when unsure how cosigning works. And be completely transparent with the guarantor so they can make informed judgments on suitability.
A trusted person guarantee can open doors when you lack financial standing alone. But don’t view guaranteed approval as an entitlement. Proceed carefully and protect those who offer to shield you from risk. Guarantors can provide valuable help without undue hardship when all parties make wise.
Jessica Rodz is the Senior Content Writer at Cashfacts. She has a long career in the field of content writing and editing. Jessica has the expertise in the UK lending marketplace where she has worked with 7 different lending organisations and acquired many responsibilities from preparing loan deals and writing blogs for their websites.
At Cashfacts, Jessica is managing a team of experienced loan experts and doing a major contribution in guiding the loan seekers via well-researched blogs. She has done graduation in Business (Finance) and now currently doing research papers on the UK financial sector.
