Does Becoming A Loan Guarantor Effect Your Credit History

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By: matthewreilly
on 21st Jul,2015

If you're considering becoming a guarantor, it's important to know the facts.
Does Becoming A Loan Guarantor Effect Your Credit History

If you're considering becoming a guarantor, it's important to know the facts. 

Over the last 5 years, since the start of the economic crisis, guarantor lenders have seen an increase in the number of people applying for loans, as the banks tighten their criteria and reduce the amount they lend. As applications for guarantor loans increase, so do the number of people being asked to stand as guarantor for a family member or friend. 

Before agreeing to be a guarantor, you should always take steps to ensure that the person who is taking out the loan can afford the repayments, as if they don't pay on time, you will be expected to pay. The first step would usually be to have a conversation with the borrower, to make sure that they have thought through how they will budget for the loan repayments. 

One of the main concerns for guarantors is the affect that the loan has on their credit rating. If the loan is kept up to date, it does not show up on the guarantor's credit file in the same way that a joint loan would. This is one of the advantages of standing as guarantor, instead of taking the loan out for the borrower, or applying for a joint loan together. As the loan won't appear on their credit file, it won't have a direct impact on their ability to be accepted for credit in the future. 

If the borrower makes a late payment, it will be marked on the borrower's credit file, as is the case with payments that are made on time, but neither payments made on time nor late payments are recorded to the guarantor's credit file. The only time a guarantor's credit history could be affected is if the lender had to apply for a CCJ, after both the borrower and guarantor had failed to make payments towards the loan. Before this happens, the lender would have to issue a default notice, meaning that the account would have been in arrears for some time, with the lender attempting to contact both parties, regularly, before having to issue the default.

The main thing to take from this is that you should only ever agree to being a guarantor if you would be happy to lend the person the money yourself, remembering that if they experience an unexpected drop in income, like losing their job, you would be expected to pay, until they were able to pay again. 

Some lenders, including one of the longest running guarantor lenders,  set out clear rules on how they will deal with arrears on their websites. Always familiarise yourself with the individual rules of the company you are applying to before going ahead, as details can vary between lenders. And above all else, if you aren't sure about something, ask.

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