Most of the guarantors that are approved for guarantor loans are parents, siblings, spouses and close friends. This is because they are people that you are regularly in contact with and can rely on when you need them. Spouses are eligible to be guarantors, provided that you have separate bank accounts.
The guarantor is someone that wants to help you in life, whether it is paying off bills, buying a new home, a new car or paying for a wedding.
You ideally need someone that you see regularly and can speak to openly about your finances. There needs to be a good relationship and trust between the parties – and there needs to be an understanding that if the main borrower defaults on payments that the guarantor can step in and make payment on their behalf.
You should always ask for the guarantor’s permission before including them in the application and the person should be aware of the responsibilities that they have.
Since guarantor loans can last from 12 months to 60 months (1 to 5 years), you need to select someone that you are going to be in contact with long-term. This is why parents and siblings are good choices, since you are always going to be connected to them in some way.
By comparison, if you select a boyfriend, girlfriend or work colleague, there is a risk that you may not be in contact in 3,4 or 5 years’ time.
If the situation arises that you cannot repay your loan at some point, the guarantor will be contacted to make a repayment and if you are not in touch or have fallen out, this can be awkward.
Your guarantor loan is essentially backed up by an individual (a guarantor) who has a very strong credit score. When the funds are released, they are sent to the guarantor first as a security measure. This gives the lender peace of mind knowing that they are sending the funds to someone with a good credit history.
A good credit score is achieved over years of paying back loans, mortgages, bills and credit cards on time – and is a huge trust signal for lenders.
So if you are unable to keep up with the repayments of your guarantor loan, you at least have someone with a good credit record who can step in and make payments on your behalf.
Guarantor lenders will favour those guarantors that have a regular income and stable employment, since this will provide confidence that they will be able to cover your payments if need be.
The guarantor should ideally have some disposable income and not living ‘pay cheque to pay cheque’ since a potential repayment could be a few hundred or thousand pounds and create a huge and unfair burden for the guarantor who was helping you out.
Equally, you should not use a guarantor who has a finite income or someone who is financially stretched such as someone on benefits, unemployed, between jobs or a pensioner.
Guarantors with a homeowner status are preferred by most lenders. This is because they would have already proven a certain level of creditworthiness and regular income to be approved for a mortgage, but it also means that they have a permanent residence where they can be contacted if need be.
Also, if the individual owns a property it means that they could always sell the property, get a second mortgage or rent out a room if they needed extra income to pay off the outstanding balance (although this would be a last resort).
Whilst homeowners have the highest rate of approval, guarantor lenders will also consider tenants and those living with family and friends, although the interest rate may be a little higher to reflect the potential risks.