Adding a guarantor is a popular method to add security to an existing loan application. For those looking for personal loans but have been turned down due to adverse credit, they are able to leverage the credit score of a strong applicant who agrees to co-sign their loan agreement and be a guarantor.
Even for those with good credit, a guarantor can still be used to increase a borrowing facility. A common example is with home mortgages and how young people may involve their parents as guarantors to maximise their loan amount and chances of approval. In fact, the likes of Barclays and Scottish Widows Bank are able to offer 100% LTV mortgage with a strong guarantor involved. (Source: The Guardian)
The catch, however, is that the guarantor is responsible to repay your loan if you cannot – so there is quite a responsibility at stake. So who should your guarantor? More importantly, who should not be your guarantor? In this guide, we will take you through all the options.
Who to choose
A close friend or family member
A popular option for your guarantor is someone who is a very close, a trusted friend or family member. As part of the process, you will usually have to share personal details and finances with your guarantor so you want to involve someone that you can trust and equally trusts you back. When it comes to approving loans, one’s parents and siblings typically have the highest approval rate. (Source: Guarantor Loan Comparison)
A homeowner
Most guarantor lenders require your chosen person to be a homeowner. Firstly, as a homeowner they have already been through the rigorous checks involved with getting a mortgage such as proving their employment and affordability. Secondly, having a guarantor with bricks and mortar provides added security that they are not likely to go missing or AWOL, and they should always be in a position to raise finance whether it is through selling or renting out their property or even getting a second mortgage.
Someone with very good credit
It is not assumed that every homeowner has good credit, as they can still be in debt. But someone with a good history of repaying other loans and credit cards on time and a low debt-to-loan ratio, gives the lender confidence that they can adequately back up a loan application. In some cases, guarantor lenders will consider tenants and those living with their parents as guarantors, provided that they have a strong credit history.
Who NOT to choose
A colleague
Whilst you may have a great and trusting relationship with a colleague, it is best not to ask them to be your guarantor. As mentioned, you will have to swap personal details and details about your finances and a colleague may not be the right person to trust with this kind of information.
Furthermore, a guarantor loan or mortgage can last up to 10 years and if you move jobs and your relationship moves apart, they are still involved in a serious financial obligation. Will you still be in contact with them in a few years’ time? Once you have brought them into a financial contract, you will need to know they will be around to repay your debts or if any complications were to arise down the line.
A new boyfriend or girlfriend
Likewise, with a colleague, it is not a wise move to ask a new partner to be your guarantor when taking out a loan. Can you guarantee you will be in this relationship forever? If it ever broke down, would you stay in contact? With a guarantor, you need the certainty of stability which, as much as you would like to think it would, is not offered in a new relationship.
Hence, siblings and parents are more likely to be good guarantors as they should remain a constant in your life.
