Your credit rating will not be affected by being a guarantor for a loan. When you apply to become a guarantor for a loan the lender will carry out a soft credit check, but this won’t have an impact on your credit score.
However, whilst becoming a guarantor in itself will not affect your credit rating, there are certain circumstances where it can. It’s important to know what these circumstances are, and how they can affect your credit score.
Let's look at what a guarantor is, and how it may affect your credit rating.
As a guarantor, you will assist another person in obtaining credit like a mortgage or a personal loan. As a guarantor, you promise to pay the person’s debt if they are unable to do so in order to "guarantee" their loan or mortgage.
It's smart to only consent to serve as a guarantor if you personally know someone. Parents frequently serve as guarantors for their kids to take the first step to own property.
Almost anyone can be a guarantor when you have different bank accounts. A guarantor is typically a spouse or parent, but it can also be a friend. However, you ought to only serve as a guarantor if you feel that you will and can repay their debt.
To become a guarantor you should:
Be at least 21 years of age
Have good credit
Be financially stable
If you are a homeowner, your application will have more credibility.
You should think about the potential pitfalls if you're thinking about serving as a guarantor.
You will be responsible for the debt if the person defaults on the loan. Apart from financial hardship, these circumstances may negatively influence friendships or lead to disputes in the family.
Being a guarantor alone has no impact on your credit rating. However, the borrower should refrain from submitting several loan applications while using you as a guarantor because this would negatively impact your credit history.
The lender will verify your credit before you sign a guarantor agreement. This credit search is typically a soft search, that won't lower your credit score and is invisible to other businesses.
Your credit score won't be impacted if the borrower makes all of the required repayments on time. However, if you have to pay for any of the borrower's payments or if the loan or mortgage defaults, this will be shown on your credit report. Your credit score will be impacted if you don't pay the debt.
Being a guarantor itself typically doesn't show up on your credit record with credit reference agencies. However, there are other ways that being a guarantor might impact your report:
You will be liable for making the loan repayments if the borrower is unable to do so, and this will appear on your credit report.
By signing on as a guarantor, you might establish a financial association with the borrower. Your credit report will detail any financial connections, and businesses may look at their credit history to determine whether or not to approve you.
It's crucial to keep in mind that guarantor loans and agreements can differ from one lender to another. Before agreeing to anything, ask the lender to clear up any questions you may have, especially on how it may affect your credit record.
There can be many reasons why someone would want you to be a guarantor. This includes:
They have no credit history
They have started new employment
They don’t earn a high salary
They don’t have a good credit score
They may need to get a guarantor with a good credit score for a mortgage or to apply to rent a property, for a personal loan, or even for car finance. Before deciding to be a guarantor, consider:
Why do they require a guarantor? If they have an unfavourable credit history, for example, what is the likelihood that they will keep up with payments?
Will they be responsible?
Why are they in need of a loan? Could they not save up instead?
If they don’t pay, can you afford to?
If you’re a guarantor for someone, it may cost you money if you have to make payments on their behalf. If you can’t make the payments, for e.g. on a mortgage, your home could be at risk of being repossessed.
If you have a low credit score, it's unlikely that you'll be able to serve as a guarantor because lenders are hesitant to accept guarantors who have a poor credit history.
There isn't a specific credit score that will ensure you get approved as a guarantor for someone.
Every lender has different criteria for lending. Whether you can afford to repay the loan in the event that the borrower is unable to, is what the lender is most interested in. Because of this, some lenders favour guarantors who are employed full-time and those who are homeowners.
Helping a family member or close friend get credit may have an impact on your ability to get a mortgage in the future.
Because you may be required to pay your friend's or relative's debt as a guarantee, this form of borrowing can have a negative effect when mortgage lenders compute your total debts for affordability.
Mortgage lenders look at every part of your income and expenses, including debts. It might prevent you from obtaining a second mortgage.
As mentioned, there is a chance that being a guarantor will raise your credit score. The borrower will need to stop making payments in order for you to somewhat improve your credit history, which means that you will be entirely responsible for repaying the guarantor loan.
Aside from that, you will have assisted a close friend or member of your family in financing something they truly needed, and their credit score may even have increased as a result.