Are you unsure about guaranteeing a loan for someone you know? In this article, you’ll learn what factors to take into consideration, so you can make a decision you’re confident about.
- Together with the borrower, see how they plan to make their loan repayments
- Like any financial product, read carefully the terms and conditions of the lender’s agreement
- Citizens Advice saw a 40% increase of people requiring advice after guaranteeing a loan
- Put away some money in case the borrower defaults on their loan
- Protecting yourself before guaranteeing a loan
- Checking on the Borrower
- Seeking advice
- Problems with guarantor loans
Protecting Yourself Before Guaranteeing a Loan
Before you come to a decision about guaranteeing a loan, think about the character of the borrower. Bearing in mind their financial history, do you think they’re mature enough to handle their loan repayments? Or, do you think they often waste money on non-essentials? Also, think about the reason they need a guarantor in the first place. If it’s because of a poor credit record, was their past behaviour to blame? If so, do you think they’ve learnt from the experience before taking more personal loans in the UK?
Next, think about what they need the loan for. Do you think they are correct in applying for the loan? Or, do you believe they could easily wait and save up the money themselves by careful budgeting?
Finally, are you willing to repay money (including interest fees) for a loan which wasn’t to benefit you? Are you willing to risk – or even lose – your own possessions for the borrower? Remember that sometimes our financial affairs don’t go according to plan. The borrower may lose their money through no fault of their own. However, this isn’t going to make you feel any better when you risk losing everything you’ve spent so long working for.
What to look out for
Take care to follow the advice below. By using these tips, you will feel confident when guaranteeing a loan, as you will have taken the necessary precautions to protect yourself if things go wrong.
Go through with the borrower to see how they plan to make their loan repayments. You should make sure that they aren’t overambitious in their budgeting.
Although you have no direct control over the borrower’s loan repayments, some money advisory services advise signing an agreement with them. This written agreement should specify that the borrower should keep you informed of their financial decisions; let you know their repayment schedule; allow you to see how much they have in their bank account and say how they’ll repay the money to you (if necessary).
Should I sign an agreement with them?
There are two problems with this advice. Firstly, if you need this degree of supervision over their financial affairs, do you really trust them enough to guarantee their loan? Secondly, if they can’t make their loan repayments for the long term loans for bad credit from direct lenders in the first place, it’s doubtful whether an agreement to repay you will be enforceable. Also, if they don’t see any possible future debt to you as their moral obligation to repay, should you be helping them borrow?
Problems with Guarantor Loans
The Citizens Advice reported in February 2017 that they had seen a 40% increase in 2016 of people coming to them for advice after being hit by shock debts as a result of guaranteeing a loan.
In previous research in 2015, they’d found that 43% of those questioned had been unsure of the extent of their responsibility once they went ahead with guaranteeing a loan.
To improve this situation, Citizens Advice have recommended that it should be a requirement for all lenders to provide guarantors with a letter of agreement. This separate document would outline their responsibilities and specify what could happen if the borrower defaulted.
Conclusion to Guaranteeing a loan
Of course, you want to lend a helping hand to a relative or friend when they want to borrow money. However, you should only say ‘yes’ if you trust the borrower 100% and that it involves a sum of money which you could afford to lose. If you risk losing your home, then you must regretfully tell them ‘no’ and try to help them in other ways. Give them advice about budgeting and saving for what they want. It isn’t worth risking your home, peace of mind and quite possibly, your relationship too for guarantor loans from direct lenders.