A guarantor will sign a loan agreement with a borrower that has a poor credit record. They will agree to pay any payments that they miss and cover costs if necessary. It allows a person to help out someone who has a poor credit record and therefore could not get a loan without a guarantor unless it was just for a very small amount. The loans tend to be for thousands of pounds and therefore allow a person who would not normally be able to borrow this much money, to be able to have a loan.

Who to Help?

If you are asked by someone to be a guarantor for loan then it is wise to take some time to think about it. Think about whether you are willing to help out this person and pay out for them if they cannot manage to make payments themselves. It is wise to only help someone that you know well. You will want to think about the risk that you are taking on and how much help they might need and whether they will be likely to repay you for any payments that you have to make on their behalf.

It is also wise to think about your relationship with them. How close are you now and do you get on well or tend to fall out. It can be very easy to fall out with someone over money and so this is a risk that you are taking when you act as guarantor. If they cannot make a payment and you have to then you have to think about what you would feel about them in this situation. Imagine if you help them out and then see them spending money on things that you feel are unnecessary, you might feel bad towards them. If you think that it could have a detrimental effect on your relationship with them, then it may be wise to not help.

It could even effect your relationship with others, perhaps if they ask you to be a gurantor for a loan they want and you cannot do it for two or they just get jealous that you are helping out this person and not them.

Why help?

You may wonder why you should help someone. However, if it is a child or member of your family or close friend then you may feel differently about it. It is good though to ask them what the loan is for so that you have an idea of whether they are spending the money they are borrowing wisely. Think about how you would feel if you had to make repayments for them and the money was going towards that item. You may feel happy to help them out but you may not. The money could be helping them to buy a car so they can find a job further afield, to pay for some medical treatment or cover some unpaid bills that they need to settle. In these circumstances you may feel happy to help but if they are buying a holiday, decorating the house or buying clothing, you may feel less inclined to help.

Is it wise to help?

It is good to think about your own financial situation before you agree to help. Although the lender will do a credit check on you to see whether they think that you are a suitable guarantor, you know more about your personal situation than they do. Think about your job stability, how much money you tend to have spare each month, what savings you have and any commitments you have with regards to spending over the term of the loan. It is worth imagining that you had to cover every single repayment and consider how you would cope in that situation. This is unlikely, but it is wise to be prepared for it, just in case.

It is also good to think about the borrower. Will having this debt actually help them? Despite having a guarantor, a loan like this can charge up to 45% in interest and therefore it will be expensive. Do you think that it is a good idea to encourage them to take out such an expensive loan? If you can afford to cover the repayments, then maybe it may be wiser to lend it to them yourself and charge a much lower percentage in interest. That could help them out a lot more. Obviously, whether you would want to do this would depend on your relationship with them again. Would you trust them to pay it back and do you want to deal with them on this basis.