If you are considering being a guarantor, it's essential to understand what that means and how being a guarantor affects your credit.
Does Being a Guarantor Affect Your Credit?
Being a guarantor means you are willing to help someone get credit if they cannot borrow money from mortgage lenders by themselves. A guarantor agrees to take legal responsibility for another person's debt or financial obligation if they cannot make the payments or meet deadlines.
For example, a guarantor may be required when someone takes out a loan, leases a car, or rents an apartment. If the person you are guaranteeing misses a payment, you’ll need to make up for it. If you accept the offer of being a guarantor, it's advisable to be a guarantor for someone you know very well and can trust.
How Does Being a Guarantor Affect Your Credit Score?
Now that we’ve explained the main question of “what is a guarantor,” you’re probably wondering whether being a guarantor affects your credit score. When you decide to be a guarantor for someone, the bank where the borrower takes the loan does a soft check on you which rarely affects your credit score.
However, your credit score may be negatively affected if the person you are guaranteeing for misses a payment or falls into default, as this will show up on your credit report.
But, your credit score will not be affected as long as the primary borrower meets deadlines and you don’t make the repayments.
Benefits of Being a Guarantor
Now that you know what being a guarantor means, you need to know some of the benefits that come with it, such as:
Give Someone a Helping Hand
The benefits of being a guarantor include helping someone get access to credit. Not only will you help the person secure a loan, but you will also help them increase their credit score.
Read more: What Credit Score Do You Start With
It Could Improve Your Credit Score
If the person you are guaranteeing falls in default, naturally, the guarantor takes full responsibility for the loan. And if you meet the monthly deadlines, the repayment situation could positively impact your credit score.
Drawbacks of Being a Guarantor
Everything has its advantages and drawbacks, and being a guarantor comes without exceptions. Here are some of the drawbacks:
It Could Damage Your Credit Score
Being a guarantor can damage and reduce your credit score, making it hard to apply for any future loans if the primary borrower falls in default and you fail to make loan repayments.
Your Assets Are at Risk of Being Seized
As a guarantor, it is your legal responsibility to make the repayments if the primary borrower defaults. But if you cannot make the payments, this will affect your credit score and assets. The lender has a full right to seize your assets or take you to court, depending on the contract signed when securing the loan.
Read more: Is a Car an Asset?
Will Being a Guarantor Affect Getting a Mortgage?
Being a guarantor for someone implies that you may have to pay off their debt, which might affect your ability to obtain a mortgage since lenders consider the potential debt you will have to pay if the primary borrower defaults.
When you apply for a mortgage, lenders take a closer look at your entire income, including existing and potential obligations. Therefore, you may be unable to obtain another mortgage as a guarantor.
Related: Everything You Need to Know About Credit Score for Mortgage
Why Are Guarantors Required?
Guarantors are typically required when the primary borrower has bad credit or no credit history. The guarantor agrees to make payments on the loan if the primary borrower cannot do so. This arrangement can benefit both parties, but it's important to remember that being a guarantor is a big responsibility.
What Is Required to Be a Guarantor?
Another important thing to remember is that anybody can be a guarantor as long as they meet the basic guarantor requirements: you need to be over 21 years old, have a good credit history, and a steady income.
A big plus is if the guarantor is a homeowner. Additionally, to become a guarantor in the United States, you need to show proof of citizenship. Usually, a guarantor is a family member helping out another family member or a close friend.
Legal Implications
There are legal implications of becoming a guarantor. You will be required to sign a legal document agreeing to be responsible for the debt. Therefore, before agreeing to be a guarantor, understand the requirements and your legal obligations.
Bottom Line
Overall, certain standards must be met to become a guarantor. It’s a big responsibility and should not be taken lightly. Also, legal implications are involved and the potential to ruin your credit score if the primary borrower defaults on the loan.
Read more: What Is an Insurance Guarantor?
