Guarantor loans can be an excellent option for those who need to borrow a significant amount of money, and they have become a very popular option for a number of reasons. If someone has asked you to be a guarantor for them, you will need to take multiple things into consideration before making a final decision. The more time you take to think about it, the better your chances will be of deciding right. Too many people rush into this kind of decision, and they usually regret it later on.
What is a Guarantor?
A ‘guarantor’ is someone who essentially agrees to assume responsibility for paying back a loan if the primary borrower is unable to for whatever reason. If the borrower gets behind on their payments, the lender has every right to go to the guarantor for the money that is owed. Being a guarantor means assuming quite a bit of risk, so it’s not something that you will want to enter into lightly.
Before you decide to be a guarantor for someone, you should consider:
Why does the person borrowing the money need a guarantor? (do they have a spotty or poor credit history? Are they already in debt to someone else?)
Is the person asking you to be their guarantor truly trustworthy?
Is the loan the person wants to take out something they really need or just want?
Would you actually be willing and able to pay back the loan for them if necessary?
What would you put up as collateral and would you be willing to lose it if you cannot pay back the loan yourself?
Is being a co-borrower safer than being a guarantor?
Many people seem to believe that being a co-borrower on a loan isn’t quite as risky as being a guarantor, but the truth is that the level of risk is just about the same. If you are acting as a co-borrower, you are still at least partially responsible for paying back the loan if the other person cannot.
Limiting your Liability
There are a number of things that you can do to protect yourself as a guarantor, limiting your liability. The guarantee for the loan should put in writing and signed by you as the guarantor. Make sure that this guarantee contract includes the amount of money for which you are liable, the circumstances in which you might have to pay, the total length of your obligation. Any legitimate lender will put all of this in writing, but you will need to keep that in mind when going forward. The last thing you want is to be unwittingly put on the hook for any other financial obligations the primary borrower has.
When you are guaranteeing a loan, the lender is required to give you a copy of essential information about the credit agreement so that you know exactly what your obligations are. The creditor must also inform you within five business days of any change to the credit contract which either increases the borrower’s obligations or shorten the payment period.
Obligations of the lender to you
The lender must make reasonable enquiries before entering the loan to ensure that you’ll be able to comply with the guarantee. You will also find that the lender should inform you of any key features of the guarantee so that you’ll be able to make a completely informed decision. The lender should recommend that you seek professional legal advice before you officially sign off on the guarantee for the loan.
There are quite a few different things to keep in mind when it comes to being a guarantor for someone else who wants to borrow money from a lender. The more time you take to consider this, the more likely you will be to make a good, informed decision. You definitely don’t want to rush into this kind of choice, because you might just end up regretting it in a big way. With all of the different angles there are to consider, you will certainly need to make a point of thinking about everything before signing any legal contract.