Issuing loans or lending money comes with certain risks. This is why the majority of lenders require that borrowers provide a guarantor for their loan.
If the borrower is unable to repay the debt on their own, a guarantor promises to do so in their stead. If you’re being asked to act as a guarantor for a loan, it’s essential that you are aware of your rights and responsibilities.
Here, you’ll get a clear idea of what a guarantor is and the key factors you should take into account before agreeing to act as a loan guarantor.
Being a guarantor – the basics
In the event that a borrower fails to make loan repayments, a guarantor promises to cover the outstanding amount or debt. Guarantors typically put up their own property as security or collateral for the loan they are guaranteeing. Sometimes, people also use their own assets as collateral for a loan to act as their own guarantor.
The words ‘guarantor’ and ‘surety’ are frequently used interchangeably.
Remember that, as a guarantor, you will be responsible for any unpaid debt of the borrower if they default on their loan. If you fail to perform your responsibility, collection proceedings or legal action may be taken against you.
If you serve as a guarantor for a business loan, for example, your role implies you will be liable for the cost of the loan if the borrower is unable to repay it. You might also be required to pay for fees, additional charges and interests related to the loan.
Therefore, taking on the role of guarantor is something you shouldn’t take lightly and accept without adequate reflection.
Aside from being asked to guarantee loans and mortgages, you may be sought to act as a rent guarantor. Some landlords require this for first-time tenants or those who don’t have an established sufficient means to rent (e.g., college students).
The risks involved
Before signing as a guarantor for a loan, it’s essential to know that you’ll be exposing yourself to the following risks:
- You may end up paying for the loan in case the borrower fails to make repayments.
- Lenders may hesitate to approve your loan application even if the loan you guaranteed is in good standing.
- Any default by the borrower or failure on your part to perform your role as a guarantor may be reflected in your credit report.
- Your relationship with the borrower may be negatively affected if they are unable to pay back the loan. This is especially true if the borrower is a relative or friend.
What to check before becoming a guarantor
To minimise the risks that come with being a guarantor and to avoid any unpleasant surprises, you need to know the following from the outset:
- Type of loan
- Whether you’ll be required to put up assets as security
- Borrower’s business status and ability to pay back the loan
- Amount to be guaranteed
- Loan amount
- Interest rate, fees, charges
- Duration of the loan
- Loan repayment schedule or number of repayments
Agreeing to become a guarantor comes with plenty of risks.
Therefore, before accepting this role, think it over carefully and get professional advice.
If this article has inspired you to think about your own unique situation and, more importantly, what you and your family are going through right now, please contact your advice professional.