Does being a guarantor affect my Credit Rating?

Posted by Andrew Brown in Credit Check on 11 February 2020

The term guarantor isn’t usually something that comes up in everyday conversation, until you’re suddenly faced with a pressing need for one, or are asked out of the blue to become one. It’s unlikely you’re reading this without some idea of what a guarantor is, so let’s get straight to the detail of what being a guarantor means.

Someone who signs to become a guarantor is agreeing to keep up payments on a rental or credit agreement if the original person named on the agreement does not or cannot do so.

This means a guarantor is legally liable for fulfilling the contract if the person who’s actually renting the property, or taking out the loan can’t.

Why are guarantors are required?

Guarantors will most commonly be required when renting a property or taking out a loan. That being said, guarantors can also be necessary for car finance, certain mortgages and other credit facilities should the applicant not meet the required creditworthiness in their own right.

Landlords sometimes require guarantors to add extra security and reassurance that rent will be paid. It’s also confirmation and reassurance that assets would be available should worst come to worst, and legal action needed to be taken to recover the rent. There are no specific requirements that trigger the need for a guarantor in a rental agreement and the option is at the discretion of the landlord or lender.

Guarantors for loans are generally only required for specific guarantor loans. These loans are traditionally aimed at customers with lower Credit Ratings and lesser Credit Histories. Consequently, guarantor loans are also renowned for higher interest rates. Again, the addition of a guarantor provides further legal reassurance for the lender that they won’t be left with unpaid debts.

What is required to become a guarantor?

Guarantors are usually required to be UK citizens, or based in the UK. Being a homeowner isn’t always a prerequisite, but will certainly help your chances of being approved.

Guarantors will also often need to prove their own ability to meet repayments by verifying their annual income and being subject to a separate credit check – with the expectation that your Credit History should be good. You’re likely to need to be aged between 18-75, but some companies will set different age limits.

You don’t usually need to be a relation, but should know the applicant well.

Although these are common requirements for becoming a guarantor, the specifics will differ for each agreement. It should go without saying, but make sure you check the specifications of a guarantor agreement before you apply to see if you qualify and find out what’s expected from you.

Legal implications of becoming a guarantor

Probably the most important thing to understand before agreeing to be a guarantor, is the legal ramifications.

By signing a guarantor agreement, you become legally responsible for fulfilling the credit agreement. Crucially, a lender or landlord can turn to you, should the amount not be paid, with the same obligations that the original borrower had.

Borrowing will generally be unsecured – so your own home isn’t at risk – but the potential implications are still far reaching.

It’s highly advisable that you only become a guarantor for someone you truly trust, because if they default, it’s you that must foot the bill and take financial and legal responsibility.

As there’s so much at stake when considering a guarantor agreement, make sure you evaluate all aspects and potential eventualities. Even if it’s someone you trust completely, there’s still the possibility of a worst-case scenario that could leave you with not just a financial dilemma but also a tricky situation with the person you agreed to be a guarantor for.

The landlord’s story

For landlords it often comes down to personal preference in deciding whether guarantors are needed. As mentioned, a guarantor theoretically adds a layer of security for you as a landlord, having someone else more financially secure to manage the payments, should the tenant struggle to pay rent. On the other hand, they can add extra hassle to securing a tenant, who will likely need time to find a guarantor and go through the affordability checks.

Some letting agents can help you decide whether a guarantor is needed and assist with the administration in adding guarantors. They can often be a good idea when dealing with people who might be at risk of missing rental payments – perhaps those with low incomes like students, or those with less-than-perfect Credit Histories or references.

It is generally not recommended for landlords to include a guarantor’s details on the tenancy agreement itself, as this can make things confusing – it needs to be clear who the tenant actually is. Should the worse happen and rental payments start to be missed, it’s advised that the landlord sends a rent demand letter to the guarantor as well as the tenant. As they are in essence jointly liable, it’s in the interests of both parties to be as transparent about the situation from the earliest possible point.

How is my Credit Report affected by becoming a guarantor?

When you become a guarantor, if the borrower maintains the payments, there will be no effect on your Credit Report or Credit Score. The initial credit check is likely to be ‘soft’, meaning there will be no direct impact as a result of having your Credit Report searched.

It is possible, however for your own Credit Rating to take a hit in the future. Should the original borrower make the odd late payment, the record of having done so will appear on their record, not your own. Should the account go into default however, responsibility for paying pass to you, and the record of the default will be lodged against you and will likely have the same impact as if you’d taken out the credit agreement yourself in the first place.

In addition, when you become a guarantor for someone for the purpose of a guarantor loan, a financial association is created. This will be recorded at all relevant Credit Reference Agencies and will mean that the person you are opting be a guarantor for could affect your ability to get credit in the future. This differs from guarantors for rental agreements, as most landlords don’t share data with Credit Reference Agencies. The only instance where a financial association could be created for a rental agreement would be if data is reported using rent reporting services like CreditLadder.

This makes it even more important to make sure you trust the person you become a guarantor for. As a default is a serious negative marker on your Credit Report, this could affect your future credit applications. Even though becoming a guarantor was intended to help a friend or family member, it could come back and bite you quite ruthlessly.

Despite the risks, if you’re sure you would be able to fulfil any missed payments on their behalf, you should be able to avoid a default and support your friend as intended. Or even better, make sure they don’t miss any repayments!

If you are considering becoming a guarantor, check your full credit report with checkmyfile before you agree to anything and see the full state of your Credit History. Checkmyfile is the only place in the UK to see data from all 4 Credit Reference Agencies. It’s free for 30 days and then £14.99 a month and is easy to cancel anytime via email or over the phone.

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