A guarantor is the person who signs an agreement to pay off the borrowerâ€™s loan if they default. They are like a safety net when borrower finds it difficult to make timely payments. Usually, people with low credit score or no credit history to show, who find it difficult to get a loan, get a guarantor to sign the agreement along with them. A person can also be a guarantor for anyone under 18 years of age requiring a loan. For repayment, the lenders always contact the borrowers and recover money from them. Only in case of consistent missed payments by the borrower or if they abscond, it is the guarantor who needs to pay the debt.
Only people who meet the following criteria can be a guarantor:
- They must be above 18 years of age
- They must be of sound mind to understand the implications of such a contract
- They must not be bankrupt
A guarantor loan is any loan that requires an individual to sign as a guarantor for someone. It is a type of unsecured loan. They fall under the sub-prime finance industry and are good alternatives to payday loans. Guarantor loans are most common in mortgage industry, especially for rental contracts.
Advantages of guarantor loans
- Lower rate of interest than other types of loans (if the loan is supported by a guarantor with good credit score)
- Flexible repayment terms with the option of shortening or extending your contract
- Larger borrowing amount with the benefit to borrow more, if required
Disadvantages of guarantor loans
- The guarantor has to pay off the debt if the borrower defaults or absconds. The guarantor does not even get the goods he/she pays for
- It can affect the guarantorâ€™s and the borrowerâ€™s credit score negatively in case of default
It is a complex situation when your friends or family members ask you to become guarantors for them. It would be wise to think it through before asking someone to be your guarantor or agreeing to be someoneâ€™s guarantor. Of course, being a guarantor has its pros:
- While it is awkward to refuse your dear ones monetary aide, you can be a guarantor to them. Thus, you help them without spending your personal finances
- You can help your friend or family member improve their credit score since they will be required to make timely payment to the lender instead of paying you â€˜as and when possibleâ€™
- It instils a sense of responsibility in the borrower as they have to manage finances to meet the monthly payment schedules
However, keep in mind that the borrower-guarantor relationship is a fragile one and, apart from the objective reasons listed at the top, can, also, affect in guarantor in the following ways:
- The guarantor has to go through credit checks and all the paperwork, similar to the borrower, and more
- The guarantor and borrower face the possibility of broken relationships or friendships in the face of monetary issues
Should you be a guarantor?
Being a guarantor and asking someone to become your guarantor has a lot of implications. Answer the following questions to yourself before making any decisions:
-Why does your friend/ family member need a guarantor? Do you know them well?
-What could their credit history be?
-What are their motives for wanting a loan and are those motives sound?
-Are you sure you are willing to pay off their debt if they default?
-How do you think your relationship with the person be if that happens?
-Can you keep the same level of respect and integrity towards the person?
-Could you help them in some other way?
-Do you really require a guarantor or can you commit towards paying off the debt yourself?
-What are you investing in? Is the loan you are applying for worth taking?
-Are you really ready to take on this financial responsibility?
-Can you keep collateral instead of asking someone to be your guarantor?
As a guarantor, you can protect yourself in the following ways:
- Get a signed copy of the amount of debt you will be liable to
- Also, get in writing the situation/s under which you will have to pay
- The tenure for which you will have to make the payment
- Make sure you are not signing to pay off all of the borrowerâ€™s debt (which could include car loan, personal loan, home loan, etc.). Read the contract carefully and add and edit clauses accordingly
- Get in writing from the borrower that they have been transparent about their monetary status and have provided you with all the key information and will keep you updated about their financial movements in the future
- In case of secured guarantee, do not list items worth more than the debt amount that can be repossessed. Make sure you get appropriate and timely legal notices, should the borrower default