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Does being a guarantor affect your credit score?
Everyone needs a helping hand occasionally, and you may have extended yours to help family or a partner secure finance. Whether you’ve gone guarantor on a home loan, personal loan, or a car loan, this will have an impact on your credit score.
How does going guarantor work?
A guarantor agreement is when the applicant of a loan invites an additional person(s) to come onto the loan as a ‘guarantor’ to agree to service and take responsibility for repayments should the applicant default.
Not only does this additional person lower the level of risk that the bank will lose its money, but their presence helps to boost the chances of approval for the applicant. This may be an ideal scenario for an applicant who has little to no credit history or has struggled with bad credit in the past.
The guarantor may agree to support the full loan repayment should the applicant default or opt for a limited guarantee for part of the loan. The latter is typically more common with home loans, in which a guarantor will support just the deposit portion of the loan to help the applicant get a foot on the property ladder. This can also help the applicant to avoid costly lender’s mortgage insurance.
Due to the level of financial risk involved, the guarantor is typically a parent or close family member of the applicant.
What does going guarantor mean for your credit score?
As expressed above, there is a level of financial risk involved when you agree to go guarantor on someone’s loan application. And because of this, there are a few ways in which your credit history and credit score may come into play:
- Hard enquiry into your credit score for the application
First and foremost, a lender will perform a hard enquiry into your credit history and credit score when you agree to go guarantor. This is because it’s not just the applicant who may need to meet the eligibility criteria of the lender, but the guarantor as well. Guarantors are typically invited on to a loan due to their having excellent credit as well has having collateral, such as a house, that may be offered up as security for the loan. The hard enquiry will show up in the credit history of the guarantor and, if the loan is rejected, this may negatively impact the guarantors’ credit score.
- Loan will show on your credit history
If the applicant is approved with you as the guarantor for the loan, this financial product will now show up on your credit history. This may be a good or a bad thing, in that an additional credit product added to your credit history may boost your score. But, if you apply for other financial products, such as a credit card, this guarantor loan arrangement may affect your chances of approval if the card issuer is concerned about your ability to service multiple sources of debt.
- Credit score impacted if applicant defaults
There is also the added risk to your credit score if the applicant servicing the loan were to default. Not only would you, the guarantor, be responsible for repayments on part or all of the loan (as per your agreement), but if the loan was unable to be repaid, the default may be reflected on your credit history. Not only could this have severe ramifications for your credit history but could adversely impact your relationship with the applicant.
Should I go guarantor on a loan?
As you can see, there is a level of financial and relationship risk involved when you agree to go guarantor on someone else’s loan. It is a major decision that should not the taken lightly, and it may be worth seeking financial advice before you sign on the dotted line.
Consider asking yourself the following questions before you agree to go guarantor:
- How much is the debt that you are agreeing to support and service? If the applicant defaulted, could you meet repayments without suffering financially?
- Are you comfortable offering up security for the loan, such as your house, and potentially losing it if the worst were to happen?
- How credible and reliable is the applicant you’re considering going guarantor for?
Disclaimer
This article is over two years old, last updated on May 7, 2021. While RateCity makes best efforts to update every important article regularly, the information in this piece may not be as relevant as it once was. Alternatively, please consider checking recent credit score articles.
