When you agree to become a guarantor for car finance, you are essentially promising to step in and cover the repayments if the main borrower fails to meet their obligations. This is a significant financial commitment, and it’s natural to wonder how this might impact your own borrowing potential in the future. In this guide, we’ll explore the implications of being a guarantor on your ability to obtain another loan in the UK.
Understanding the role of a guarantor
Before delving into the specifics, it’s important to understand what being a guarantor entails. A guarantor is a person who agrees to repay a borrower’s debt if they default on their loan repayments. Lenders may ask for a guarantor if they believe there’s a risk that the borrower might not be able to make the repayments. Often, this is the case for individuals with poor credit histories or young adults who have not yet built up a credit history.
Credit score implications
One of the primary concerns for those considering becoming a guarantor is whether their credit score will be impacted. In the UK:
1. Initial check: When you agree to be a guarantor, the lender will usually perform a credit check. This can be a ‘hard’ search, which might leave a footprint on your credit file. Numerous hard searches in a short time can negatively affect your credit score, making it seem as though you’re desperately seeking credit.
2. Payment defaults: If the borrower defaults and you, as the guarantor, fail to cover the repayments, it can be marked on your credit file. This will undoubtedly reduce your credit score and could make it harder for you to obtain credit in the future.
Loan application assessments
When you apply for a loan or any form of credit, lenders assess your affordability – how much you can afford to borrow and repay. Being a guarantor can impact this assessment in several ways:
1. Potential liability: Even if the borrower is making regular repayments, some lenders will consider the full loan amount you’re guaranteeing as a potential liability. This could reduce the amount they’re willing to lend to you or even result in a declined application.
2. Debt-to-income ratio: Lenders might count the guaranteed loan in your debt-to-income ratio, which is a measure of your monthly debt payments against your income. A high ratio might make lenders view you as high-risk.
🚗 More information: How do I know if I can be a guarantor?
4 ways to mitigate the impact
If you’re contemplating becoming a guarantor or already are one and are concerned about future borrowing, consider the following:
1. Open communication: Regularly communicate with the borrower. Ensure they’re managing their repayments, and be prepared to step in if they face financial challenges.
2. Limit the number of guarantees: If possible, only act as a guarantor for one loan at a time.
3. Review the agreement: Familiarise yourself with the terms. Know when and under what circumstances you might be called upon to make payments.
4. Check your credit report: Regularly monitor your credit file to ensure there are no unexpected changes or inaccuracies. In the UK, you can check your credit report with major credit reference agencies like Experian, Equifax, or TransUnion.
While being a guarantor for a loan is a noble gesture, it’s crucial to understand the potential implications for your own financial health. It can affect your ability to obtain credit in the future due to the perceived risk by lenders. Before agreeing to be a guarantor, consider the risks, communicate openly with the borrower, and monitor your financial health regularly.
🚗 You might like this guide: Can a guarantor stop being a guarantor at any point during the loan term?
