Loan Guarantor
A loan guarantor is someone who promises to pay a loan if the primary borrower does not make the payments as promised. People with lower credit scores or no credit might ask a relative or friend to guarantee a loan so they will be approved for the loan or so they can get a lower interest rate. When you sign on as a loan guarantor, your name is put on the loan and, depending on how the terms are written, your credit score may be affected the same way it would be if you were the primary loan holder.
Potential to Raise Your Score
If the person you guaranteed the loan for pays as agreed, your credit score may benefit because each month the loan is paid as agreed may be recorded on your credit history as well as on the other person's credit history. Because payment history makes up 35 percent of your credit score, this can be beneficial. And if you haven't previously had an installment loan, your score might increase because 10 percent of your credit score is based on how many types of credit you have.
Potential to Lower Your Score
If the person does not make their payments on time, your credit report might indicate the late payments and your score would decrease accordingly. Your score may also be lowered by the additional debt that you appear to be taking on, because should the person default on the loan, you would be liable for paying it back, which could hinder your ability to repay any debts you have.
In addition to the potential to lower your credit score, when you are listed as a guarantor of a loan, most lenders consider that money you are liable for and will decrease the amount they would otherwise be willing to lend you.
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