Whether you’re applying for finance yourself or considering becoming a guarantor for someone else, it’s important to understand the responsibilities involved.
Understanding the role of a guarantor
A guarantor is someone who agrees to take responsibility for a car finance agreement if the main borrower is unable to make their repayments. This provides lenders with an extra level of security, which can make it easier for someone with little or poor credit history to get approved for finance.
A guarantor is typically a family member or close friend with a strong credit history and a stable financial situation. Their role isn’t just a formality—if the borrower misses payments, the guarantor is legally required to step in and cover them.
Why might you need a guarantor?
Car finance lenders assess applications based on factors like credit score, income, and financial history. If you’re a first-time borrower or have a low credit score, you might struggle to get approved on your own. This is where a guarantor can help.
By agreeing to back your application, a guarantor reduces the risk for the lender, making them more likely to approve the finance agreement. This can be particularly useful if you:
- Are a young driver without a long credit history.
- Have had issues with missed payments in the past.
- Are in temporary employment or self-employed with an inconsistent income.
- Need a car but don’t meet the lender’s usual requirements.
What are the responsibilities of a guarantor?
Becoming a guarantor is a serious financial commitment. While you won’t be expected to make payments unless the borrower defaults, you must be prepared and able to do so if necessary.
Key responsibilities include:
- Covering missed payments: If the borrower falls behind, you’ll need to step in and make the repayments.
- Risking your own credit score: If payments aren’t made, this could negatively impact your credit history.
- Being financially stable: Lenders usually require guarantors to have a solid income and a good credit record.
- Understanding the contract: Before signing, you should fully understand the terms and conditions of the finance agreement.
What happens if the borrower and guarantor both can’t pay?
If both the borrower and the guarantor fail to meet the repayment terms, the lender may take further action. This could involve legal proceedings, repossession of the vehicle, and damage to both parties’ credit scores. It’s essential for both the borrower and guarantor to carefully consider their financial situation before entering into an agreement.
A guarantor can make it easier to get approved for car finance, especially if you have a limited or poor credit history. However, it’s a significant responsibility for both the borrower and the guarantor.
If you’re considering asking someone to be a guarantor or taking on the role yourself, make sure you understand the financial risks and legal obligations involved. Taking time to review the terms carefully can help prevent problems further down the line.
