The idea is simple - to compensate any doubts a lender might have about your credit record, you ask someone to stand as guarantor for your loan, meaning they’ll be held responsible for paying it back should you fall behind on payments.
The challenge is finding someone who will back your loan. They have to be both willing and able to demonstrate that they can afford to pay back the loan if you can’t.
One question we often hear in relation to this is - what if my guarantor is retired or is about to retire? It might be that you have parents or grandparents on a pension who you’re thinking about asking to be your guarantor. Or, you might already have a guarantor loan, but now your sponsor is on the verge of retirement.
In principle, there’s no major issue with a loan guarantor being retired. There are, however, a few things to bear in mind.
Can your retired guarantor afford to back your loan?
Most people experience a drop in income when they retire. When you switch from earning a wage to drawing from a pension, you’re effectively living off savings and investments you, and perhaps your employer, have been putting away over the years. Your pension value only goes so far, so it’s important that it is rationed carefully to see you through retirement.
If you’re thinking about approaching a retired friend or relative to stand as your guarantor, it is important to bear in mind that their cash flow (i.e. their access to ready money) might not be as healthy as you assume. Loan providers will certainly want to see evidence of what their earnings from a pension are, and may refuse to lend to you if they don’t feel your guarantor has the means.
If you have an existing guarantor loan and your sponsor retires, it’s important to speak to them about how their change in financial circumstances affects their ability to meet the commitments they signed up for. If in doubt, speak to your loan provider.
Is there an age limit on retired people being a guarantor?
Most lenders won’t accept a guarantor over the age of 75. Moreover, it is common for them to ask that the term of any loan be completed by the time the guarantor turns 75 - which means you have to pay off the loan by then. If you’re asking someone who’s retired to back your loan application, the lender will structure the terms so the loan period ends before their 75th birthday.
Does my guarantor have to own a home?
Not necessarily, but it’s a factor that can help with all guarantor loan applications. Owning a home may just sway a lending decision in your favour even if your guarantor does not draw much of an income from their pension.
What about my guarantor’s own financial history?
It’s important that your retired guarantor has a good credit history and a good credit score. Any problems in the past with paying their own bills or defaulting on loans, and they’re likely to be refused as your sponsor.
Andrew joined Choose Wisely 5 years ago, originally working in a design capacity to make sure the website was simple to use. Most notably he worked with the Consumer Finance Association to design the comparison table of choice for High-Cost Short Term Finance products.