A loan guarantor, much like a rent guarantor is a person who agrees to take responsibility for repaying a loan if the borrower is unable to do so. This type of arrangement is often used when a borrower has a limited credit history or a low credit score, and is considered high risk by the lender.
In this article, we will explore the role of loan guarantors, how they can help borrowers secure a loan, and the potential risks and responsibilities that come with being a guarantor.
How to find a loan guarantor step by step
Before you get started with the process of finding a guarantor, understand each step a guarantor goes through as they require some level of preparation. If you follow the details sequentially, you should avoid mistakes and increase your chances of finding a guarantor.
Step 1 – make a list of people
The first step in finding a loan guarantor is to make a list of people that are close friends or family members who could have the funds necessary and you trust enough to put on the loan agreement as a guarantor.
Once you have exhausted this list think about your wider circle for potential guarantors including colleagues, friends of friends and distant relatives.
You could be able to persuade them to be your guarantor if you are able to explain how they would be involved in the agreement and what the loan is for in the first place.
Usually, the closer the guarantor is to you, the better this will work out so only use these wider acquaintances as a last resort.
As you make this list, think about the long-term relationship of these potential guarantors as if you default on a loan repayment and they, as a guarantor have to pay it, you have to consider this as a possibility and if it is worth having finances involved in your relationship with them.
If it is a parent as a guarantor or a relative who has supported you financially before, they may find it easier to sign as a guarantor. Nonetheless, depending on the type of loan and the guarantor’s financial situation, how you see your relationship with them panning out in the future should be considered.
Step 2 – qualify your list
In order to qualify people for a guarantor, you must make sure the guarantor meets the typical requirements that loan companies look for.
What is their age?
The requirements that lenders have for guarantors usually require them to be over the age of 18 and under the age of 70. Having said this, guarantor requirements will vary between lenders. Younger people as guarantors tend to have a poor credit history due to not a lot of time to show they can handle money well.
Older people as guarantors tend to be avoided as guarantors as they are out of work and maybe living off pensions that aren’t producing a lot of disposable income. Also, there is a greater chance that they will pass away as a guarantor or fall ill while they are still a guarantor on a loan.
What is their credit report?
The guarantor will also have to have a good credit rating. This can be looked at through analysing someone’s credit score. However, some lenders may do a hard credit check on the guarantor and find the credit report of the guarantor in more detail.
The guarantor would have to give consent for this hard credit check but it may be a necessary step in the loan approval process.
Things that will show up on a guarantor’s credit report include any loans they already have, if the guarantor has a mortgage, what their salary is, if the guarantor has defaulted on any loans in the past and the the health and age of any credit or debit accounts of the guarantor.
Each lender will have a different way of assessing a guarantor’s credit report and they may use the credit report of the person taking out a loan as well as the guarantor’s in their decision.
Is their income decent?
While guarantor income is a factor in the credit report, it will be looked at separately too by the lender. Typically, if the guarantor is a homeowner, this is a positive sign that they have a decent income and other lenders have already approved them for a more complicated loan that carries higher risk (a mortgage).
Also, guarantors who are self-employed and may have a history of income that isn’t substantial aren’t usually suitable. As well as those that are already guarantors and don’t want to become a guarantor twice.
For example, if a guarantor has been working as a freelancer for the past 6 months and their income changes month-to-month. Lenders prefer those with stable, predictable income to be a guarantor.
What are the disqualifying factors for a guarantor?
So you can disqualify some people, this list gives you an idea of what lenders will deem as a riskier guarantor.
Those whose financial situation is likely to change
This includes guarantors who are likely to retire soon or go on maternity or paternity leave. There is no point in a lender approving a loan with a guarantor if the guarantor is only going to be earning income for a short period of time before their income severely reduces.
If the guarantor needs to step in and cover a payment it is unlikely they would be able to do so if this was the case.
Those who live overseas
Sometimes, you may have potential guarantors who are close friends or relatives who live outside of the UK. However, these are not good candidates for guarantors, regardless of their income. This is because the guarantor would need a UK bank account to check if their credit report is sufficient.
A lender would not want to take on a guarantor even if they can prove they are making a lot of money if the documents they are using aren’t british as the guarantor may have other risks on their credit report.
Step 3 – prepare
Preparation for taking out a loan with a guarantor includes you needing to be clear what the reasons are you need the loan.
More acceptable reasons for taking out a loan with a guarantor include consolidating debts into one loan, home improvements and repairs, unexpected life events or anything to do with an emergency.
Not only will you need to prepare for the application of the loan with the guarantor you will also need to prepare for the conversation you have with the guarantor to persuade them to be on your loan agreement.
Remaining up to date with the numbers and knowing how much you intend to borrow with the guarantor and at what interest rate and when the guarantor will expect the money to be paid back, if necessary are all things you should communicate the both the lender and guarantor.
Especially if you are not in regular communication with the guarantor.
Good reasons for taking out a loan with a gurantor
In particular, home improvements are desirable reasons for lenders and guarantors because they usually will improve the value of the home and if this is a home you own, it is seen as a good financial investment if the property appreciates in value, even if you need a guarantor for it.
As well as this, emergencies are something that loan companies will be accepting about nad understand why you need a guarantor in this situation. It is common for cars to break down or there to be unexpected time out of work due to health reasons.
These warrant good reasons for taking out a loan with a guarantor because they don’t qualify as circumstances you will be in for the long term.
Determining loan affordability with a guarantor
A direct lender will use the figure of an applicant’s disposable income to determine if they are suitable for a loan with a guarantor. If this figure is over a certain rate, they consider the approval of the loan with or without a guarantor.
Typically, the lower the disposable income is in relation to the loan repayments the more interest will be charged on the loan as it is considered high risk. People with lower risk loans have a higher disposable income in relation to the loan repayment so will not usually need a guarantor.
Guarantors cannot push up the disposable income of the loan by contribution, instead, they are just there for higher risk loans in case the lower disposable income from someone borrowing isn’t sufficient for the month.
The lender therefore reilies on the guarantor to have better affordability for loan repayments and potentially also reduce interest rate. Find out how much a guarantor should earn to get a better idea of this affordability by reading further.
Step 4 – asking the guarantor
Once you have everything else in place, the final step would be to ask the guarantor to cover your loan. It is important to do as much to diligence as you can before you ask.
As you do this, you could go through the approval process of the loan with the guarantor, whether that be online or on the phone. This is a good idea as there may be information that you aren’t aware of that the guarantor has to give.
On top of this guarantors and most likely will need to submit official documents such as passports, proof of income in the form of bank statements, proof of address and give approval for a hard credit check if needed.
What should you do if you can’t find a loan guarantor?
If you can’t find a loan guarantor there are a few things you can do to gain access to finance you need. Some of which focus on using a different method to a loan itself or by changing the terms of the loan you do want so you don’t need a guarantor.
Ask for a personal loan rather than a guarantor
Sometimes, it may be the case that if you explain the terms of a loan and credit involved to a guarantor, they will be sceptical about putting their name as a guarantor.
It may be that the guarantor feels they are signing up to an agreement they have little control over or they do not trust you to pay every month based on your financial situation.
As a result, a guarantor may feel it is a lot simpler to just hand you the money rather than become an official guarantor and ask you to pay it back at a later date.
In this sense you will be able to find a way to take out a loan without a guarantor. This would just be a simple hand shake and verbal agreement that will give each party a better peace of mind.
Doing things this way also means there is no interest on the loan unlike if you took out a loan with a guarantor (unless they charge the person borrowing for it). But, you still have a loan like i fyou did have a guarantor in the first place.
Take out a smaller loan
While this may be hard because of circumstances that you need the money for, you may be able to pay the bare minimum at the current time and pay the rest later to avoid needing a guarantor.
This is common if you are taking on a loan because you need to consolidate a debt. Only focus on the highest interest payments at first and pay the minimum payment on the rest of the loans later. Gradually moving forward with paying off every bit of debt in separate chunks without a guarantor.
This method works because the smaller the loan you take out, the more likely you are to be approved without needing a guarantor.
Increase income and reduce expenses
While this may seem obvious and unavoidable because of the situation you are in and your need for a guarantor in the first place, it is always a wise idea to budget and try and get a different way to cover the costs you have.
Also, do not be afraid to ask for help from local authority can’t get a guarantor and you need help with housing or reach out to food banks in order to meet cost for food.
In conclusion, finding a loan guarantor can be a helpful way to secure a loan when you have a limited credit history or a low credit score. The most important part of finding a guarantor is to communicate openly and honestly.
Do your absolute best to make all loan payments on time once you do have a guarantor too.