Want to Be a Guarantor on Loan? Here are the Legal Implications
Taking out a loan is something that comes with a lot of responsibility. When a person is getting a loan, he thinks that everything will turn out to be perfect. However, the reality is far from that as everything isn’t sunshine and rainbows. To avoid any kind of hassle regarding the repayment of loans, most lenders require that the borrowers have a guarantor over the loan. A guarantor is like a backup plan as he agrees that he will pay back the loan if the original borrower is not able to do so. So, there is a binding agreement that involves the lender, the borrower, and the guarantor.
Sometimes, you may be forced by your friends or family to become a guarantor for their bank loan, but that doesn’t mean that you should dive headfirst without knowing anything about what you’re getting yourself into. Sometimes, you might need someone to vouch for you. But, before you do that, you should know certain things about how to find a guarantor so that you are not putting yourself or the other person at any risk. For example, if someone wants to get a loan from a bank, and you fit the criteria of becoming their guarantor, you will be obligated to a lot of financial implications. If the original debtor is not able to pay back the loan, it is your responsibility to do so, including all the fees, additional charges, and interest that may come with the loan, without legally owning the rights to anything that the loan was used to acquire. Here are some things that everyone should consider before getting themselves into something that they don’t fully understand.
Can Anyone Be a Guarantor?
Almost anyone can be a guarantor, but as a rule of thumb, you should only be a guarantor for someone who you can trust with your life because you will virtually be doing the same. Oftentimes, it is a parent, a spouse, a brother, a sister, or someone from the immediate family member as there is a bond of trust that can be developed. The most basic requirements of being a guarantor include being over the age of 21, having a good credit history, and financial stability.
How Does a Guarantor Loan Impacts You
Most people think that signing up for a guarantor loan is only an agreement to make sure that the borrower pays back on time and that you are vouching for him to repay his debt. However, a guarantor’s duty doesn’t stop at making sure that the loan is repaid, but these dealings can have a very consequential impact on his own credit score and loan eligibility. If the borrower elopes and you don’t have the financial standing to pay back the loan immediately, it will negatively affect your credit score. Therefore, a bad credit score will make it difficult for you to get a loan in the future and limit your borrowing capacity.
If you are facing issues such as bad credit and you can’t get a loan for yourself, a guarantor loan solves a lot of problems for you as you can quickly borrow money without much trouble. However, experts advise that you should only make someone else a guarantor for loans of shorter tenure. It makes sure that the guarantor and the borrower are not stuck with each other for a long time, and their relationship stays healthy. The sooner the responsibility of the guarantor ends, the less stressful it will be for you.
Understand Your Liability
Becoming a guarantor needs to be a very informed decision. When you choose to do so, you can’t decide what you are going to be liable for. You will be legally bound to pay for the loan if the original borrower defaults. The whole reason for setting up a guarantor is to ensure that the borrower, who is himself not able to get a loan, gets it on behalf of someone, and the banks make sure that they don’t lose money in case of a default by the borrower. Before you sign any documents, you must make sure that you have the financial capability of returning the amount of loan if the original borrower can’t.
There are certain ways you can minimize the risks involved and lessen the burden on your shoulder. Firstly, you can convince the borrower to get an extra guarantor on loan. Where you will still have to pay the bank in case something happens, the monthly installments will be divided between you and the other guarantor so you will not be overburdened. Another way to protect yourself is by asking the borrower to take loan payment insurance. It makes sure that in case the borrower dies or gets in an accident, the insurance company will be liable to pay back the loan, and you will not have to face any consequences.
What Are The Effects Of Becoming A Guarantor?
If you have decided to become a guarantor, you need to know what you will have to face in the future. When you are applying for a loan or credit yourself, you will have to tell your credit provider about any loans that you are acting as a guarantor for. It will help the creditor to determine your financial situation, and he might take this fact into account to decide whether or not you will be able to repay a new loan on top of being a guarantor for an existing loan. It doesn’t matter who is making the payments for the loan, having your name on the legal agreement as a guarantor will be taken into concern. Moreover, in case the debtor defaults and you are unable to repay the amount of loan, the lender can take legal action against you. It will have some pretty negative effects on your credit report, and you might be unable to get a loan for yourself in the future.
Conclusion
When you choose to become a guarantor for someone, make sure that you have enough money to repay the loan in case the debtor defaults. A guarantor loan is a pretty great option for someone with a bad credit score, but it doesn’t mean that you have to put yourself at any risk. Make sure that you take your assets into account and only go for someone you can trust so that you don’t have to face any difficulties.
