Have you been asked to be a guarantor?

A guarantor is someone who agrees to take responsibility for another person’s debt or financial obligations if they fail to meet their commitments. This could include loan agreements, mortgages, or rental agreements. By acting as a guarantor, you provide additional security to the lender or landlord, ensuring that the borrower or tenant will meet their obligations. If the borrower defaults, you are legally required to pay the debt on their behalf.

While being a guarantor may seem like a simple favour, it’s important to remember that it comes with significant financial and legal risks. Understanding these risks can help you make an informed decision about whether or not to act as a guarantor.

In general, anyone over the age of 21 who is financially stable can act as a guarantor. However, there are certain criteria that lenders and landlords typically look for:

Financial Stability: Guarantors need to demonstrate that they have the financial means to cover the debt if necessary. This often means having a steady income, savings, and no history of financial instability.

Good Credit History: Lenders and landlords typically prefer guarantors with a strong credit history. This reassures them that the guarantor is financially responsible and more likely to be able to meet the obligations if required.

Homeownership: Being a homeowner is often preferred by lenders, as it provides additional security in case the guarantor needs to cover the debt.

Employment Status: Guarantors are generally expected to be in full-time employment at the time of the loan or rental agreement.

No Joint Accounts: Lenders may also require that the guarantor does not have any joint financial accounts with the borrower or tenant.

There are several reasons why a borrower or tenant might need a guarantor. Here are some of the most common scenarios:

New Job or Unstable Employment: If the borrower has just started a new job or is currently unemployed, lenders may be hesitant to approve the loan without the added security of a guarantor.

Low or Irregular Income: People with a low or inconsistent income may find it difficult to secure loans or rental agreements on their own. A guarantor provides reassurance to lenders or landlords that the payments will be made.

Bad Credit or No Credit History: Individuals with poor credit or no credit history may be viewed as high-risk borrowers. A guarantor can help mitigate this risk by providing an extra layer of financial security.

Joint Tenancy: If the borrower is renting a property with a partner or friend, and their financial situation is not ideal, a guarantor may be required to cover the rent payments in case of default.

Typically, there are no direct costs for being a guarantor unless the borrower or tenant defaults on their payments. In such cases, the guarantor is legally required to cover the debt. The cost to the guarantor will depend on the terms of the guarantor agreement and the amount of debt the borrower has accrued.

If you fail to make the payments on behalf of the borrower, the lender or landlord may take legal action, which could result in the seizure of your assets. Therefore, it’s crucial to only agree to be a guarantor if you are confident in your ability to cover the debt if necessary.

A guarantor agreement outlines the terms and conditions of your responsibility as a guarantor. It will specify the amount of debt you are guaranteeing, the duration of the agreement, and the actions you will need to take if the borrower defaults on their payments. It’s crucial to read and fully understand the guarantor agreement before signing it.

Some guarantor agreements may include clauses that allow the borrower to terminate the agreement early, or provisions that allow you to withdraw from the agreement if certain conditions are met. However, it is important to note that once you sign the agreement, it is often difficult to remove yourself as a guarantor.

Once you sign the agreement, it is usually very difficult to remove yourself as a guarantor. However, there are a few potential ways out:

Cooling-Off Period: Some agreements include a 14-day cooling-off period, during which you can cancel the agreement without penalty. However, this is only applicable if the borrower has not yet received the loan or funding.

Termination Clauses: Some agreements may allow you to withdraw after a certain period, especially if the borrower has built up enough equity in a mortgage or has demonstrated their ability to repay the debt.

Early Repayment: If the borrower repays the loan early, the guarantor’s obligations may be lifted. However, this depends on the specific terms of the agreement.

Being a guarantor can affect your credit score, especially if you are required to make payments on behalf of the borrower. While simply being named as a guarantor on a loan agreement or tenancy agreement does not appear on your credit report, missed payments by the borrower can be recorded and negatively impact your credit report and credit history. If you are unable to meet the guarantor’s liability, it could also result in a poor credit rating, which could affect your ability to secure loans or rental agreements in the future.

If the borrower fails to make their payments, you, as the guarantor, will be legally required to cover the debt. This includes both the principal and any additional costs, such as late fees or interest. The lender or landlord may take legal action to recover the debt, which could include seizing assets or garnishing wages. This can have a severe impact on your credit rating and financial situation.

If you are acting as a guarantor for a tenancy agreement, this could also affect your relationship with the borrower. The guarantor's liability is not limited to your share of the debt but could extend to the entire loan or rent payments. If you are unsure about your responsibilities, it’s important to seek legal advice before agreeing to be a guarantor.

When acting as a guarantor for a tenancy agreement, you are agreeing to take responsibility for the rent payments if the tenant fails to make them. This means that if the tenant defaults, you will be legally required to pay not just your share of the rent but potentially the entire amount. Additionally, you may be responsible for any damage to the property, cleaning costs, or unpaid utility bills.

In a joint tenancy, the guarantor’s liability extends to the full rent amount, not just the tenant’s portion. If you are unsure about the specifics of your obligations, it’s important to seek legal advice before agreeing to become a guarantor.

Before agreeing to be a guarantor, ask yourself the following questions:

Can I Afford to Cover the Debt?: Ensure that you have the financial means to pay the debt if the borrower defaults.

Do I Trust the Borrower?: Make sure that the person you are guaranteeing is responsible and likely to meet their obligations.

What Are the Terms of the Agreement?: Review the guarantor agreement carefully to understand your responsibilities and the potential risks involved.

How Will This Affect My Credit History?: Understand the potential impact on your credit score and credit history if the borrower defaults.

Am I Prepared for Legal Action?: Be aware that if the borrower defaults, the lender or landlord may take legal action to recover the debt, which could affect your finances and your relationship with the borrower.