Should you sign a Guarantor Loan for your Friend?

If a friend approaches you and asks you to be a guarantor on a loan for them, you may have trouble deciding what to say. It is worth knowing more about what a guarantor loan is, the consequences of being a guarantor and how your decision might impact your friendship, before you make up your mind.

What is a guarantor loan?

A guarantor loan is designed for borrowers who have a poor credit record and therefore cannot get a standard loan. Instead of looking at the credit record of the borrower, the lender will allow the borrower to pick a person that will act as a guarantor and their credit record is looked at instead. The guarantor will be there to pay any outstanding debts that the borrower cannot manage including late payment fees and things like that.

This can therefore be a way for someone to borrow money that may not have any other means of doing so. The loans tend to be for thousands of pounds and therefore a significant amount of money which could cover costs of home repairs, buying a car or things like this, that people often have to borrow for. The loans are more expensive than a standard personal loan as the lender still considers them to be risky, due to the poor credit record of the borrower, despite the fact that the guarantor will make any missed payments.

What does a guarantor do?

A guarantor will have to prove their identity and provide proof of address and sign papers when the loan is taken out. Then if the borrower struggles with repayments, they will have to make those repayments on their behalf. It might be that the borrower has already missed payments for a few months before the guarantor is asked to pay and so there could be late repayment fees to pay as well.

The borrower has no obligation to repay any money to the guarantor. So if they pay a few, a lot or all repayments on the loan; it is up to the guarantor and the borrower to come up with an agreement as to whether the guarantor will be compensated for what they had to pay out. Legally they will not have to repay anything to the guarantor but the two may come up with an agreement between them. As a guarantor, it is wise to imagine that worst case scenario, where all repayments are made by the guarantor and consider what you would expect the borrower to do with regards to repaying you, in this circumstance. Then you should discuss this with the borrower before signing up to anything so you both understand the terms of your agreement. It would be wise to have a written copy of this, signed and witnessed by other people, so that if there is any disagreement as to what you agreed to at the beginning, then it is all written down for you to see.

The impact of being a guarantor

It is also worth thinking of the impact that being a guarantor might have on your own finances and credit rating as well as your relationship with the borrower. It is good to consider how much the total cost of the loan could be and what an impact it would have on you if you had to repay all of it. Although this is unlikely, it is best to plan for the worst just in case. Start by finding out form the lender how much will have to be repaid in total, including the interest so you have a figure to work with. Then consider where you would get the money from and how you would manage without that money. It may be that you have enough savings to cover it, your monthly pay would cover repayments or something else. Do make sure that you would have enough.

Having any loan has an impact on your credit rating. It will show on there that you are a guarantor This could have an impact on how easy it would be for to borrow in the future or while this current loan is still outstanding. It may also change your credit rating if the loan was not repaid on time.

Lastly you need to consider your relationship with the borrower. You could potentially be lending or giving them a large chunk of money and this could lead to problems between you. It could be that they will expect you to lend to them again or act as a guarantor on a future loan and you may not be prepared to do it again. It may be that they are not able to pay you back any repayments that you have had to make for them and this could make things strained between you if you need the money or want it for something specific. It may even cause problems with other friends if they find out and expect you to help them out in a similar way.

Conclusion

So although being a guarantor sounds like a nice things to do in order to help out a friend, it can be more complicated than it seems. You want to not only protect your friendship but also your finances as well. Turning them down, may make things difficult between you, but it could be even more difficult if you end up paying out a lot of money for them and do not get it back. Therefore it is a decision that you should think really hard about and consider the impact on everyone around you of doing it. There is also a cost issue in that it would be cheaper for you to get a loan and them make the repayments as you could one at a lower rate than they could or if you have enough savings you give them the money and they repay when they can. It is worth thinking about all of the options as well as the consequences of them.

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