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Guarantor loans are a fantastic way for people with bad credit to borrow money and start repairing their credit score by making regular repayments. But if you’re thinking of helping family with a guarantor loan — perhaps by being their guarantor — then there are some things you should know before you make the decision.
This week, we’re going to dig into all of the things you should be thinking about before helping family with a guarantor loan, from what it involves to whether it affects your credit score.
What’s involved in being a guarantor and helping my family with a guarantor loan?
In a nutshell, you agree to pay the borrower’s repayments should they fail to make their payments.
In terms of bare bones and logistics, there’s no more to it than that. 80% of all guarantors never have to pay a penny.
However 20% of guarantors do end up paying money towards the loan they’re guaranteeing, so there are lots more things to consider, starting with the financial and moving into the personal.
Things you should consider before helping family with a guarantor loan: the money stuff
Is the person you’re going to guarantor for responsible with their money?
A few big questions you need to remember to ask yourself are: are they responsible? Do you trust them? And why do they need the money?
After that, ask yourself: do they need the money desperately? Is it for something they could just save up for? Is it to repair their credit score, start building credit or consolidate debt?
Only you and the person you’re being a guarantor for can answer those questions, but remember that you’re putting your money on the line if they don’t pay.
You have a right to those answers from them, and you have a right to say no if you don’t feel comfortable.
That said, it’s also a good opportunity for them to put your mind at ease and to start an open dialogue about money. (Which sets the relationship off on the best foot.)
Can you afford to make the repayments?
Even if it seems highly unlikely you’ll end up making repayments on the borrower’s behalf, you should still consider whether you’d be able to pay the repayments in the worst case scenario. (For example, if they lost their job or became ill and couldn’t afford the repayments, would you be able to make the repayments?)
Being a guarantor could affect your credit score.
While in most cases, being a guarantor shouldn’t affect your credit score, if the person borrowing the money defaults on their payments and you are unable to make them, then this will be added to your credit report and affect your credit score.
Being a guarantor could affect your mortgage application.
While being a guarantor doesn’t affect your credit rating (unless you default), it can have an effect on your applications for a mortgage.
Because mortgage lenders look at every aspect of your finances, from incomes and outgoings to potential outgoings in the future. Being a guarantor means that you might need to pay off a debt in the future, which can affect your affordability calculations.
Make sure you know what’s at risk if you both default
Like we said, 80% of all guarantors never pay a penny.
But, just in case, it’s important to know that in the very worst cases, being a guarantor can damage your credit score and even lead to your home (or possessions) being repossessed.
That’s why it’s extremely important to be sure you can afford the repayments and that you’re comfortable being the guarantor, because once you’ve signed up to be a guarantor, you can’t change your mind
Unfortunately, once you’ve signed a loan agreement and the loan has been paid out to the borrower, you can’t change your mind.
That’s why it’s important to carefully consider guarantor loans from a guarantor’s perspective before you sign the document.
Now, that’s the money stuff taken care of, but what about the personal stuff?
Things you should consider before helping family with a guarantor loan: the personal stuff
The final thing you need to think about is your relationship with the person borrowing money.
Unfortunately, money is always a tricky subject.
Talking about money, being owed money, owing money, being worried about money… These are all things that can cause undue stress in your personal relationships.
That’s why it’s equally crucial to think about your relationship with that person. If they default and you end up paying their debt, would you be angry at them? Would you be able to forgive them? Or would your relationship suffer and be at risk?
Being a guarantor is a fantastic way to help loved ones borrow money, but it can also end up causing tension and problems so it certainly shouldn’t be rushed into.
- Author The Bamboo Team
- Posted 22 July 2019