YCIS

A personal finance website

Author: Ellen Mills

What it Means to be a Guarantor

Has a friend or family member recently asked you to be a guarantor for them? Are you wondering what it means and if you should do it or not? Here at YCIS we are here to help explain what it means to be a guarantor and to explain what you may need to consider before agreeing and signing those documents.

What is a Guarantor?

You may initially be wondering, ‘what is a guarantor anyway’? Quite simply, it is someone who agrees to help out another person (usually a friend or family member) by promising to make the repayments on a loan or other credit agreement should the borrower be unable to meet the repayments for any reason. Guarantor loans have become increasingly popular in recent years.

Could you give someone a financial helping hand?

Why Would Someone Want a Guarantor?

Usually, it is more a case of someone needing a guarantor rather than wanting one. Chances are, a lender or credit provider has taken a look at the applicant and decided that they are not willing to risk lending them the money as a sole applicant – as they believe they are unlikely to get it back. This could be because the applicant:

  • is young and has no credit history
  • has a credit history but heir score is poor
  • has a low-income job

But the lender may be willing to provide the loan if they have the additional backing of a guarantor – such that if their fears come to pass and the repayments aren’t made, the guarantor is there to step in and ensure the lender gets their money back.

Should I Agree to Be a Guarantor?

Being a guarantor is a perfectly legitimate thing to do, but you need to think carefully about whether it is something that is right for you. How well do you really know this person and how much do you trust them to repay the loan? There is a reason that they require a guarantor – do they have sufficient finances to meet the repayments? Is the loan for something essential such as a car repair, or is it for something less critical that they may just have to defer – such as a holiday?

Remember, if you have agreed to be a guarantor and the borrower fails to meet the repayments, both of your credit scores could be impacted. You will also be stuck with the bill for repayments.

Also, once the credit agreement is signed, you can’t back out as the loan will have been made on the provision that you have agreed to act as a guarantor. So it is no light thing to agree to become a guarantor and needs to be carefully considered – but equally, your help could give someone a real boost to their finances.

Stocks & Shares ISA’s Explained

Most people are familiar with the term ISA and understand what a cash ISA is. But when it comes to the world of stocks and shares ISA’s it all gets a bit murkier. This article seeks to demystify the stocks and shares ISA and help you try to decide if putting savings into this type of ISA is a good move for you.

Confused about ISAs?

Let’s start at the beginning…

First off, it’s important to briefly explain what an ISA is. An ISA is an ‘Individual Savings Account’ for which you won’t get taxed on any interest you earn. There is a limit (also called an allowance) on how much you can invest (£20’000 per year at the time of writing) and should you withdraw any of the money invested in a year, you won’t be able to replenish it.

For instance, if you put the full £20,000 into an ISA at the start of the tax year, and one month later decided you needed to withdraw £10,000 – you wouldn’t then be able to put that £10,000 back into the ISA until the next tax year rolls around.

There are two main types of ISA’s. Cash ISA’s and Stocks and Shares ISA’s.

Cash ISA’s are basically a bog-standard savings account. You put money in and earn interest on that money while it is in there, either at a variable rate or a fixed rate. At the time of writing, with the Bank of England base rate at 0.75% – the best rate available for a Cash ISA is around the 2% mark.

This is all well and good and generally speaking, your money is totally safe in one of these accounts, but the amount of interest you are going to be able to earn is always going to be limited to the interest rate on the account. This is where stocks and shares ISA’s come in.

If you want greater returns for your savings and you are prepared to accept some level of risk that you could see your savings diminish, then investing some or all of your ISA allowance in a stocks and shares ISA could be for you.

A stocks and shares ISA is essentially a ‘wrapper’ that covers shares purchased with your ISA allowance and allows some or all of the money made from these to be claimed tax-free. The actual amount that is tax-exempt is different depending on if the money made is via dividends or capital gains.

In the 2019-20 tax year, the first £2,000 made in dividends is tax-free. Any capital gains from the stocks are tax-free. However, everyone in the UK is subject to a capital gains limit of £12,000 (this is subject to change in subsequent tax years).

Sounds good right? Well, the flip side of this is, of course, that share prices can down as well as up – so there is an element of risk in purchasing shares and you could actually end up with less money and not more.

Summary

So in a nutshell – stocks and shares ISA’s provide a tax-efficient way to invest in shares. The great thing about them is that you could stand to make a lot more money than if you put that ISA allowance in a cash ISA. The bad thing about them is that they carry a lot more risk and you could actually end up losing money rather than making it.

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