Who is a Loan Guarantor
A guarantor is a person or entity that agrees to be responsible for another’s debt or performance under a contract, if the other fails to pay or perform.
In this context, a guarantor is a person who guarantees to pay for someone else’s debt if he or she should default on a loan obligation. A guarantor acts as a co-signer of sorts, in that they pledge their own assets or services if a situation arises in which the original debtor cannot perform their obligations.
If a borrower defaults, the guarantor will not only be liable to pay the amount but also his credit score may take a hit as the information on the loan guaranteed will reflect in the guarantor’s credit report.
So, before you sign on the bank or financial institution’s documents as a guarantor do understand the nature of the guarantee and seek advice on the legal implications. Sign as a guarantor to only those people who you know are financially sound and will be able to repay their loans. Also, if you find any clause of the bank or financial institution unacceptable, discuss it with the lender and do keep track of repayment with the borrowers so that you are aware whether the loan is being repaid in a timely manner or not.
Why banks or financial institutions ask for loan guarantors
Banks or financial institutions require one or two guarantors for home, education or vehicle loan, which are of higher amounts. Banks or financial institutions insist on guarantors if the loanee has low credit score or if the loan amount is above the minimum limit. The guarantors are required to meet the norms specified by each bank or financial institution and each bank or financial institution will have its own guidelines if a borrower is not able to get a guarantor. In such cases, they may ask for additional security or the loan to have a joint applicant.
Typically, banks or financial institutions ask for a guarantor who is a government employee or a banker for an additional security layer. Experts say it is always advisable to speak with the company concerned before becoming a loan guarantor for someone if the person himself is planning to take a loan. Banks or financial institutions usually reduce the loan eligibility to the extent of guarantee. However, each bank or financial institution has its own credit policy depending on the overall debt burden including the loans that the person has guaranteed.
Being a Guarantor on someone else’s loan is a very big commitment. Before you agree to it, you need to weigh the pros of helping someone get a loan they might need against the cons of possibly getting stuck paying for a debt you didn’t incur.
- Understanding the Responsibility of a guarantor: When you guarantee a loan, you are pledging yourself to pay on the loan if the borrower doesn’t pay. The main advantage to being a guarantor is that you can help someone else get the credit he or she needs.
- Your Trust Level in The Borrower: While it may seem cold-hearted to evaluate your child, parent, sibling, or friend for trustworthiness, it might be necessary if you don’t want to find yourself paying off someone else’s debt.
- Consider If Being a Guarantor Could Negatively Impact the Relationship: Additionally, you need to consider the impact being a guarantor might have on your relationship with the borrower. Will you be constantly nagging the borrower to make sure that he or she fulfills the obligation? What happens if the borrower defaults?
- While you may be a helping a friend or relative by becoming a loan guarantor, any default by the primary borrower may land you in trouble with serious financial consequences. By signing as a guarantor for a loan, you are providing a guarantee to the lender that you will repay the debt if the borrower or the co-borrower fails to repay either due to death or any other reason.
- Is the monthly repayment something they can afford: You need to consider if the person you are guaranteeing can afford to pay the loan within the stipulated time. Looking at their financial records and past history would be a great way to determine if they can repay the loan. This is also points to your knowledge level of the borrower. Someone could be a friend or family member and yet you may not know the person very well. There’s an adage in Nigeria that says that “There is no friend when it comes to money”. You have to be absolutely sure that you are willing to breach this saying before guaranteeing somebody.
The topic “money” is something that causes rifts in relationships. You could lose a friend when you guarantee them and you could also gain a relationship when you guarantee. Bailing a friend or family out of trouble is an act that mostly cannot be forgotten.
- If the borrower has bad credit and wants to use the guarantor loan to boost their credit score, this is up to the guarantor to decide how likely it is that the person will be able to repay. If they know the person well and feel very confident that they will repay, then it will be very low risk and they will be helping out their friend demonstrate their creditworthiness and improve their credit rating. This will make it easier for the borrower to obtain other credit and loans in the future without the need of a guarantor.
- By agreeing to be a guarantor, one should consider whether the borrower can use alternatives. If that borrower belongs to a credit union, they can save significant amounts on the interest by applying for finance from a credit union. Other ways to obtain low-cost finance include being eligible for a 0% credit card where you pay no fees provided that you can repay what you have borrowed each month on time. Simple ways to get money is if the borrower has a lot of unwanted items around the house like CDs, clothes or jewelry, they may be able to get the money they need by selling their things on EBay or at a local car boot sale.
- If the borrower needs a loan for an expense or special purchase, the guarantor has to consider how important it is that they require the loan. If they need the loan for a non-urgent purchase like jewelry or a new car, the guarantor needs to think whether the borrower should be trying to save up for something like this rather than taking on debt and getting a guarantor involved. By comparison, something like a holiday which gets more expensive the longer you wait to book or a funeral which needs to be paid for immediately, it may be easier to access funds through a loan rather than wait a long time to save up.