Bank account guarantor (or a guarantor on a loan) refers to someone that is willing to provide a financial guarantee on behalf of a person with no (or poor) crediting history.
This is a common requirement as individuals without sufficient credit history face challenges in getting approved for loans.
In certain instances, it may be one of the many requirements that a bank looks for before issuing credit. Other requirements might include a bank reference letter, personal account statements, or even a letter from an accountant.
In this article, we’re going to explore bank account guarantors in greater detail. We’ll also discuss the risks for both the borrower and guarantor.
Feel free to use the table of contents to skip ahead to the topics most relevant to you:
Table of Contents
- What are Guarantors?
- Guarantor Agreement
- Who Can Be a Guarantor?
- What Are the Risks for the Guarantor?
What are Guarantors?
Generally speaking, guarantors are third (often related) parties that guarantee the repayment of a loan, mortgage, or other financial commitment in case of non-payment.
In other words, the guarantor commits to pay a borrower’s debt if the borrower defaults on their financial obligations.
Guarantors are typically required when the individual applying for credit does not have a sufficient credit history in order to meet the lender’s requirements.
That said, not meeting the lender’s requirements does not always mean that the individual has poor credit. Instead, it could mean that the applicant lacks credit history or their loan-to-income ratio is insufficient, which can happen when a young person is seeking a personal line of credit.
In the case where a guarantor is required, the guarantor typically has to use their own income or assets in order to collateralize against a loan.
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A guarantor agreement is a legally binding document outlining the terms of the contract between a guarantor and a lender.
Guarantor agreements state that the guarantor is liable for the debt of the guaranteed borrower in case the borrower defaults on their obligations.
In short, a guarantor becomes legally responsible for fulfilling the credit agreement by entering into a guarantor agreement. Usually, the guarantor agreement is created and provided by the lender.
Who Can Be a Guarantor?
In most cases, a family member or close friend acts as a guarantor. That said, there are usually no specific requirements for who can (and who cannot) be a guarantor.
Of course, in order to be a guarantor, the individual needs to be of legal age of majority in the issuing jurisdiction, which is usually over 18 or 21 years old. Each lender has its own requirements.
Needless to say, if you are thinking about becoming a guarantor, make sure you understand and think through all the risks before moving forward. Can the borrower realistically afford the payments? Can you realistically cover the payments if the borrower defaults? Has the borrower gone through their financial situation in detail to confirm that they can realistically afford the payments?
Additionally, it’s important to note that the bank will request supporting documentation from the guarantor and also check their credit history. Other information and documents the lender may ask for could include proof of identity, bank statements, personal accounting statements to reflect private assets, and more depending on the situation.
What Are The Risks for the Guarantor?
The most obvious risk for guarantors is if the borrower defaults on payments or commits other legal issues regarding the loan. In this situation, the guarantor becomes responsible for the debt. If the guarantor doesn’t pay the debt, they’ll damage their own credit history and face other legal issues.
In addition to the above, being a guarantor could also expose you to other risks, which we’ll explore in more detail below.
Unlimited vs Limited Guarantor:
When signing a guarantor agreement, it’s important to read all the fine print and contractual terms. Additionally, pay close attention to the type of guarantor stated in the contract.
Unlimited guarantors are something to be wary of because they result in the guarantor being liable throughout the entire loan contract. In other words, they are jointly responsible for any subsequent borrowings or financial liabilities the borrower may enter into in the future.
For example, let’s say you just signed on as a guarantor for your niece’s educational loan. Your niece’s loan agreement was to cover her four-year university degree. However, as the years go by, your niece decides to increase the loan amount to finance her graduate studies further. As a guarantor in this scenario, you are responsible for the initial loan and the loan top-up she’s taken for graduate studies.
Alternatively, a limited guarantor has some control over their obligation. For example, they might choose to guarantee a loan only up to a specific time, after which the borrower alone assumes the remaining responsibility.
Your Credit Score and Ability to Secure Financing
Generally speaking, becoming a guarantor does not affect your credit score as long as the borrower makes all the payments on time and does not default on the loan. However, if the borrower makes late payments, this negative payment history will be recorded on the guarantor’s credit report. As a result, the guarantor’s credit score and ability to secure financing can be negatively impacted.
In the UK, when you become a guarantor for a loan or mortgage, a financial association is created. And, financial associations are recorded in your credit report. As a result of this association, guarantors can sometimes face challenges in securing their own loans because adding the borrower’s existing debt and proposed loan against their financial ability may put their finances in an unhealthy position. From a lender’s perspective, this additional financial responsibility might make the guarantor’s profile too high when conducting an “affordability” check.
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