What Is a Guarantor On a Loan?
Who needs a guarantor?
Young people, people with little or no credit history and people with low incomes are frequently asked to have a guarantor when they apply for a loan. This is simply because the lender may not be confident in the borrower’s ability to pay the loan in the event of a job loss, illness, injury or other circumstance. With a guarantor, the bank has a person to fall back on to make the loan payments if the borrower can’t or won’t.
What does it mean to be a guarantor?
Being a guarantor for someone is a dangerous and risky endeavour. Guarantees are written in several different ways and you really need to understand exactly what the implications are, what your responsibilities are, and what will happen in the event that the borrower stops paying on the loan.
Some guarantees are written in such a way that the lender can demand payment at any time from the guarantor without even proving default. Sometimes when there are more than one guarantor jointly guaranteeing the whole loan, the lender can demand payment from any one of the guarantors for the whole amount, instead of just a portion. It is imperative that you review the guarantee thoroughly with your lawyer so that you completely understand these situations.
Being liable for someone else’s loans can seriously affect your credit and ability to borrow as well. The loan amount that you have guaranteed will be counted as your own debt on a credit application.
Serious implications
You may think that guaranteeing a loan is a simple matter to help your son or daughter get approved for a loan. It is not. It is a serious legal obligation that you are taking on. Anything could happen to make it impossible for the borrower to make his payments, and if that happens – you will be called on to assume the entire amount plus interest and fees.
If you have agreed to be a guarantor for a personal loan, you have until the credit is approved and the contract is signed to change your mind and withdraw.
In the event that you are asked to honour a guarantee, speak to your lawyer right away before you do anything else.
Before you agree to go guarantor
Think over the situation and factors involved before you agree to guarantee a loan.
- How much is the loan?
- Is the borrower responsible enough to be able to repay the loan?
- Is his or her job stable?
- What if they lose their job or get sick? Do they have insurance or other income?
- If you were called on to repay the loan, can you afford it?
Remember, it’s more than just a nice gesture for a mate or family member. You’re not obligated to say yes just because you’re asked.
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- Home Loan For Migrants
- How to use a Family Guarantee to get a Home Loan
- How to use Family Equity for a home loan deposit
- How does your Property work as Security for a Home Loan
- Getting A Loan Even Without Savings
- What is LVR And How is it calculated?
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