Many lenders nowadays require a guarantor on a loan, or a person responsible for guaranteeing therepayment of a loan if the signed borrower is unable to do so.
The influence a guarantor has onthe approval of the loan is immense, as they are one of the most significant aspects a bank willconsider 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 youshould make before saying yes.
Not onlymust you demonstrate that you areeconomically solvent (your assets aregreater than your liabilities), but you mustalso consider the fact that there’s a chancethat when all is said and done, you may beresponsible 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 helpingsomeone 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:
1. What exactly are you agreeing to?
Simply put, as a guarantor you are responsible for the outstanding debt if the borrower of theloan fails to make payments on the agreed-upon amounts. This means that all of your present andfuture 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 takesplace first to ensure that the borrower is unable (through their salary or assets) to makepayments.
● If the borrower is found that they cannot pay, you must take over the monthlyinstallments, including any interest or late payment penalties.
● If you end up struggling with the payments, your own assets or income could potentiallybe 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 personborrowing the money. The following requirements demonstrate your capacity to repay the loanamount:
● Perhaps obviously, the guarantor must be an adult.
● You must demonstrate that you have a sufficient and stable income. Beyond salary, thiscould be a pension or any other type of income.
● Through your income, you must demonstrate the ability to provide monthly payments ifthe loan ends up becoming your responsibility.
● As a guarantor, the bankwill want to determinethat you have minimal or,better yet, no outstandingdebt.
● An ideal guarantor willhave equity and assets,most commonly in theform of fully paid off realestate. This providescomfort to the bank asthese 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 andliabilities that you face.
● As a guarantor, you have the right to a copy of the guarantee letter, as well as any otherimportant documents related to the transaction of the loan.
● Additionally, you have the right to discuss the loan with a lawyer before signinganything.
● You can also rightfully call upon the borrower to fulfill loan repayments and release youfrom your liabilities.
● As a guarantor you are liable for the loan if the borrower is in default of payments to thebank, and are liable for any other liabilities that the borrower faces (in relation to theguarantee 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 oneguarantor, but that doesn’t necessarily mean that the responsibility and liabilities are sharedequally among guarantors.
● Some guarantors are responsible for the entire loan, while others are only responsible forrepayment of partial amounts of the loan. In this case, only limited money is required asrepayment.
● Under a joint guarantee, the death of one of the guarantor passes the obligations on to theremaining, surviving guarantors.
● With a joint and several guarantee, the death of one of the guarantors means that theirestate is liable for repayment to the loan, along with the assets and incomes of thesurviving guarantors.
Before signing on the dotted line, it is important to consider that this agreement will link youwith both the bank and the borrower for the duration of the life of the loan—this could meanseveral decades. Doing so could have potential repercussions on your finances, as well as onyour relationship with the borrower. Be completely clear and aware of all terms and conditionsof the loansand think long and hard about the possibilitythat you may end up responsible for repaying it.
