Just because one has insufficient income, no credit history, or in fact a bad credit rating, it doesn’t mean they are excluded from the prospect of taking out a loan. In today’s age the emergence of car financing specialists dedicated to those with poor credit serves a market that constitutes some of the most credit-needy within our society. However, applicants also have another option to source competitive financing arrangements. That is, nominating a guarantor for the loan.
A guarantor is another party who agrees to cover any loan repayments that the borrower does not make. While the necessity of a guarantor is sometimes imposed by a financier, applicants have the ability to nominate someone like a family member to act as their guarantor.
If you are asked to act as a guarantor it’s critical that you understand your legal obligations. You will be responsible for the full value of the loan in the event of a default, as well as associated costs including interest. If security has been offered as a guarantee, not only are you unable to use this for another loan, it may be claimed by the financier to offset a loan default. Financiers may also have access to other assets not offered as security. Unlike a co-borrower, the guarantor does not have any legal basis for ownership of the vehicle.
Like a lender would, you should assess the applicant’s ability to make payments and whether they are financially reliable. Do they have a steady job? Are they just going through a temporary rough patch? Don’t ever underestimate the delicacy that financial matters can place on a relationship, no matter how close that relationship might be.
If the prospects of acting as a guarantor concern you, you may choose to contribute in another capacity. For example, one option would be to offer a lump sum as a deposit. This could sufficiently persuade the financier to drop the requirement of a guarantor, thus separating any legal boundaries.
The other equation to consider is what impact acting as a guarantor would have on your own credit history. Notwithstanding whether the borrower fulfils their duties, the fact that you are merely acting as a guarantor will influence your ability to attain future financing. If you decide to apply for any other loans, you are obliged to disclose your responsibility as a guarantor. As you can imagine, to a new lender this poses a new risk, even if payments are being made. On the other hand, if payments are not being made, or there is a default on the loan, your credit history will be impacted significantly.
While a financier will consider several aspects when deciding to offer finance to an applicant, it’s important one’s application is as thorough as possible and leaves as little doubt as possible in the mind of the lender. Most of all, as a guarantor you need to understand what you’re signing up for, including the nature of the loan, the term, and the amount. With this, it’s always better to guarantee for a fixed amount across a set period, and make sure you seek all the necessary expert advice.