A loan guarantor is a person who agrees to repay a loan if the primary borrower fails to do so. This means that the guarantor is responsible for the debt in full, so it’s important to understand the rules and responsibilities involved before you sign on as a guarantor.
What are the risks of being a loan guarantor?
There are a number of risks associated with being a loan guarantor, including:
- Financial risk: If the primary borrower defaults on the loan, you will be liable for the entire amount of the debt, plus interest and fees. This could have a significant impact on your finances, and could even lead to bankruptcy.
- Credit risk: If the primary borrower defaults on the loan, your credit score will be damaged. This could make it difficult to obtain credit in the future, or could lead to higher interest rates on loans.
- Relationship risk: If the primary borrower defaults on the loan, it could put a strain on your relationship with them. This is especially true if you are a family member or friend of the primary borrower.
What are the benefits of being a loan guarantor?
There are also some potential benefits to being a loan guarantor, including:
- Helping someone you care about: Being a guarantor can be a way to help someone you care about get the financing they need. This could be especially important if the primary borrower has a bad credit history or is unable to qualify for a loan on their own.
- Improving your credit score: If the primary borrower makes all of their payments on time, your credit score could improve. This is because being a guarantor is a form of “positive credit history.”
- Building a relationship with a lender: Being a guarantor can help you build a relationship with a lender. This could be beneficial if you are planning to apply for a loan in the future.
How can I protect myself as a loan guarantor?
There are a number of things you can do to protect yourself as a loan guarantor, including:
- Read the loan agreement carefully before you sign it. Make sure you understand the terms of the loan, including the amount of the loan, the interest rate, and the repayment schedule. You should also understand your responsibilities as a guarantor.
- Only guarantee loans for people you trust. This is especially important if you are a family member or friend of the primary borrower.
- Get a co-signer. A co-signer is another person who agrees to repay the loan if the primary borrower defaults. This can help to reduce your risk of being held liable for the debt.
- Limit your liability. Some lenders will allow you to limit your liability as a guarantor. This means that you will only be responsible for a certain amount of the debt, even if the primary borrower defaults.
- Get legal advice. If you are not sure about your rights and responsibilities as a guarantor, you should get legal advice from an experienced attorney.
Conclusion
Being a loan guarantor can be a risky proposition, but it can also be a rewarding experience. By understanding the rules and risks involved, you can make an informed decision about whether or not you want to sign on as a guarantor.
