It’s an all too familiar proposition. You may have insufficient income, or perhaps no credit history, or in fact a bad credit rating. But how do you obtain finance for a loan? Well, fortunately, these conditions don’t exclude you from seeking out finance. 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 in our society. However, applicants also have another option to source competitive borrowings. They may do this by nominating a guarantor for the loan.
A guarantor is a separate 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 as their guarantor. For example, a family member.
If you are asked to act as a guarantor, it’s critical that you understand your legal duties. You will be responsible for the full value of the loan in the event of a default, as well as associated costs. This includes interest, which we all know can accumulate quickly. If security has been offered as a guarantee, not only are you restricted from using this towards another loan, it may be claimed by the financier to offset a default loan. Financiers may also access other assets not offered as security. Unlike a co-borrower, a guarantor does not have any legal claim towards vehicle ownership.
You should always assess the applicant’s ability to make repayments and whether they are financially reliable. Do they have a steady job? Are they going through a temporary rough patch? Don’t ever underestimate the delicacy that financial matters can place on a relationship, no matter how strong that relationship might be.
If the prospect of acting as a guarantor concerns you, consider assisting in another capacity. For example, you could offer a lump sum as a deposit. This may persuade the financier to drop the requirement for a guarantor, thus separating legal boundaries.
The other equation to consider is what impact acting as a guarantor would have on your credit history. Even if 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, this poses a risk to a new lender, even if repayment history is good. On the other hand, if payments are not being made, or there is a default on the loan, your credit history will be negatively impacted.
While a financier will consider several aspects when deciding to offer finance to an applicant, it is important one’s application is as thorough as possible and leaves little doubt 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, but always seek out expert advice to assess your individual circumstances.