What You Should Know Before Being A Guarantor On A Loan

Many lenders nowadays require a guarantor on a loan, or a person responsible for guaranteeing the repayment of a loan if the signed borrower is unable to do so.

The influence a guarantor has on the approval of the loan is immense, as they are one of the most significant aspects a bank will consider before approving a loan for a large amount to either a business or individual.

If you’ve been asked by a family member, friend, or associate to cosign on a loan, there are numerous considerations you should make before saying yes.

Not only must you demonstrate that you are economically solvent (your assets are greater than your liabilities), but you must also consider the fact that there’s a chance that when all is said and done, you may be responsible for the entirety of the loan, including its accrued interest.

The fear that you may be responsible for the loan shouldn’t automatically deter you from helping someone by cosigning, but you should do so after understanding all of the risks. Here are some things you should know before being a guarantor on a loan:

What To Know Before Being A Guarantor On A Loan

1. What exactly are you agreeing to?

Simply put, as a guarantor you are responsible for the outstanding debt if the borrower of the loan fails to make payments on the agreed-upon amounts. This means that all of your present and future assets are at stake and can be used for the repayment of the debt.

● While you may end up being held responsible for the loan, there is a process that takes place first to ensure that the borrower is unable (through their salary or assets) to make payments.
● If the borrower is found that they cannot pay, you must take over the monthly installments, including any interest or late payment penalties.
● If you end up struggling with the payments, your own assets or income could potentially be confiscated to serve as repayment.

2. Do you even qualify as a guarantor?

In order to be considered a suitable guarantor, you must meet the same criteria as the person borrowing the money. The following requirements demonstrate your capacity to repay the loan amount:

● Perhaps obviously, the guarantor must be an adult.
● You must demonstrate that you have a sufficient and stable income. Beyond salary, this could be a pension or any other type of income.
● Through your income, you must demonstrate the ability to provide monthly payments if the loan ends up becoming your responsibility.
● As a guarantor, the bank will want to determine that you have minimal or, better yet, no outstanding debt.
● An ideal guarantor will have equity and assets, most commonly in the form of fully paid off real estate. This provides comfort to the bank as these assets could be used to pay off the balance of the loan.

3. As a guarantor, what are your rights and liabilities?

Just as you should be aware of the value of the loan, it is also important to consider the rights and liabilities that you face.

● As a guarantor, you have the right to a copy of the guarantee letter, as well as any other important documents related to the transaction of the loan.
● Additionally, you have the right to discuss the loan with a lawyer before signing anything.
● You can also rightfully call upon the borrower to fulfill loan repayments and release you from your liabilities.
● As a guarantor you are liable for the loan if the borrower is in default of payments to the bank, and are liable for any other liabilities that the borrower faces (in relation to the guarantee document).

4. What should you know about the various types of bank guarantees?

Pay careful attention to the various types of bank guarantees. Some require more than one guarantor, but that doesn’t necessarily mean that the responsibility and liabilities are shared equally among guarantors.

● Some guarantors are responsible for the entire loan, while others are only responsible for repayment of partial amounts of the loan. In this case, only limited money is required as repayment.
● Under a joint guarantee, the death of one of the guarantor passes the obligations on to the remaining, surviving guarantors.
● With a joint and several guarantee, the death of one of the guarantors means that their estate is liable for repayment to the loan, along with the assets and incomes of the surviving guarantors.

Before signing on the dotted line, it is important to consider that this agreement will link you with both the bank and the borrower for the duration of the life of the loan—this could mean several decades. Doing so could have potential repercussions on your finances, as well as on your relationship with the borrower. Be completely clear and aware of all terms and conditions of the loans and think long and hard about the possibility that you may end up responsible for repaying it.

Money Journey

Money Journey

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