Guaranteeing a loan loaded with risk, responsibility

By Michael Lloyd

Acting as a guarantor to help a friend or relative take out a loan, secure a mortgage or enter into a tenancy agreement is a generous gesture. But it's important to understand your what you're getting into before you sign on.

Most of the time, you can act as a guarantor as long as you have a solid financial background, though some lenders will specifically look for someone who owns property or other high-value assets. Many guarantors agree to back the principle borrower, but are never called upon to help pay the loan, as the borrower follows through on his obligation.

Considerable risk
There is always the risk, however that the borrower can't afford to pay back what they borrow and stops paying. If so, you will be wholly liable for the entire amount borrowed, the same as if you'd taken out the debt yourself.guarantor-risks

"Before agreeing [...] assess the primary borrower's credit, income and expenses to determine whether he or she is capable of [repayment]," emailed Jane Clack, money adviser for debt management firm PayPlan, in response to questions. "The person who guarantees the loan must be prepared to repay the entire amount if necessary and should not agree to guarantee a loan if he or she is financially unable to do so."

Once you've determined the borrower keeps his accounts in good standing, the next step is to consider your own credit record. Firstly, you will likely have to undergo a credit check to be a guarantor, so if you have or are planning to apply for credit products of your own, remember too many applications can dent your score.

Secondly, even if your friend or relative keeps up with payments now,
there's no way to predict a sudden change in income that could prevent him
paying in the future. And if the primary account holder defaults, it'll appear on your credit profile, and will continue to damage your score the longer it goes unpaid.

Finally, consider the worst-case scenario if the person you're guaranteeing fails to keep up her payments. Not only could that prevent you from applying for financial products in the future, but you could receive letters or calls from collectors, face the possibility of bankruptcy or even bailiff visits and charges on your property if the borrowed money was secured with your assets.

Clack recalls a time she witnessed a court case for a woman who had guaranteed a loan for her sister: "The woman said, 'But this is unfair, I didn't borrow the money or have any benefit from it'. The judge looked at her and said 'I'm sorry, this is not about fairness, this is the law'."

Ending a guaranteed loan
You won't be able to get your name taken off a loan you've guaranteed, even if it's been kept in good order. The only way to be done with the account is to pay it off. You can try a couple of things to remove yourself from the account sooner.

First, if the principle borrower has handled the account well and is now in a position to take out a loan on his own, you could ask him to do so and use the new loan to pay the off the original.

If his finances aren't that stable yet, or if he has stopped paying altogether, you'll need to get the loan in order yourself or negotiate a payment plan that the principle borrower can manage.

The exception: a fraudulent agreement. According to a June 2015 Daily Mail article, debt charities are hearing complaints from people saying friends or family were able to list them as guarantors without their permission. The article says sometimes, lenders do not check that a guarantor has actually agreed to back the principle borrower, or that the guarantor can actually afford repayments.

If somebody lists you as a guarantor without your consent, you aren't legally required to repay any amount borrowed, and might even be entitled to compensation. Consent means you physically or electronically signed documentation to become a guarantor. If someone has listed you without your consent, you can make a complaint to the Financial Ombudsman Service.

See related: Beware 'joint and several' agreements, What to consider before adding authorised user

Published: 14 July 2015