There’s always some sort of concerns involved when trying to obtain a guarantor loan, most especially on the guarantor’s part. One of the common issues that raise confusion is the effect of the loan on one’s credit rating.
Effect on the Borrower
First of all, a guarantor loan affects the borrower the same way that a regular loan does. While borrowers themselves don’t have to undergo credit checks, being late or defaulting on their payments would be reported to the credit reference agencies, and thus can pull down their credit even further.
Effect on the Guarantor
The loan itself doesn’t have any effect on the guarantor’s credit rating, as long as the borrower keeps up with the repayment terms as agreed. If they don’t, two scenarios may happen:
a) The lender will contact the borrower with the aim of coming up with a suitable arrangement so that the borrower can still pay the loan back. But if the borrower doesn’t respond or refuses to make any payments, the guarantor will be contacted. The guarantor will have to shoulder payments for any outstanding balances, as agreed, and then nothing will happen.
b) If the borrower refused payment, and the guarantor refuses as well, the lender may take a court action against them. That is when things can get ugly, and both their credit standing will suffer.
Being a Guarantor vs. Being a Co-signer
There’s a common confusion associated between being a guarantor and being a co-signer, so it’s worth discussing them here. First, as a guarantor, your only purpose is to make payments if the primary borrower fails to do it. Additionally, you become a secondary payer, and will only be asked to make the payments on the borrower’s behalf after all means to collect payments by the lender are exhausted.
On the other hand, when you co-sign a loan, you share equal responsibility and liability with the other borrower. Meaning the lender can collect payments from you the same way that they can from the other co-signer. It doesn’t really matter who makes the payments, as long as one of you does. However, the lender also doesn’t care who uses the money, because you are both equally responsible to pay back the loan. Moreover, if you both fail, both of your credit will be affected.