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Woman's hand placing a penny into a white piggy bank to save money rather than risk the repercussions of not being able to repay a guarantor loan.

Repercussions of Not Repaying Guarantor Loans

Guarantor loans may seem like the perfect solution if you have bad credit and need a loan, but you need to think about the worst case scenario. For example, ask yourself how it will affect your life and the life of your guarantor if you suddenly can’t repay the loan. There can be serious repercussions if you don’t repay your guarantor loan.

It Affects Credit Rating

Guarantor loans are unsecured loans that are generally used by consumers who either have poor credit due to not paying debts on time or don’t have credit history at all. Guarantor loans differ from traditional loans in that both the borrower and guarantor will be negatively affected if the loan is not paid as agreed. Since the credit report is going to show the loan wasn’t paid as promised, it can affect both individuals in the future when they want to pursue other things that require a good credit report, such as cell phones, insurance, rentals, etc.

Causes Additional Fines and Fees

Although guarantor loans may be slightly different than traditional loans, the one thing they have in common is that they both result in late fees when the payments are not made on time. Additional fines and fees increase the overall balance of the loan, making it even harder to pay off if financial difficulties arise. In some cases, the fines may also be subject to interest charges. Therefore both parties become responsible for an even higher amount than what they originally borrowed.

Affects Future Ability to Obtain Credit

One of the worst things about guarantor loans is they affect both the borrower and the guarantor. If the payments are late, this shows up as a black mark on both credit reports. Credit reports are the first thing a lender looks at when a customer wants to borrow money. When the borrower isn’t making payments on time, the guarantor’s credit report is going to indicate that they were late on payments and limit their financial options.

Damaged Relationships

Generally, when an individual needs a guarantor to obtain a loan, they choose a close friend, family member or someone they’re close to and trust. Many relationships are permanently damaged due to guarantors having to repay loans that a friend or family member promised to pay but didn’t.

The best way to prevent this is by not getting a guarantor loan unless absolutely necessary. Also, as a potential guarantor, one should consider the reasons why the borrower can’t get the loan without a guarantor. If it’s due to poor credit, make sure the circumstances that caused the bad credit have changed or improved.

Loss of Property or Possessions

When a guarantor loan is used for a mortgage, the repercussions can be even greater. If the fine print indicates that the guarantor can obtain possession of the home, the borrower can lose the home even if he or she has made previous payments on the loan. Additionally, if the guarantor wants to purchase a home during the loan term, he or she may be denied because it will appear there is already one open mortgage loan and which skews his or her debt-to-income ratio, which is an important factor with banks and lenders.

Last Updated: February 10, 2016