Being A Guarantor: Who Can Be One and What It Means

Guarantor loans are when a third party guarantees the repayment of a loan between a borrower and a lender.  A guarantor loan is often needed if a borrower has a bad credit history, or very little, as they agree to repay the money if the borrower ultimately cannot.  They act as a guarantee to the lender that the money will be repaid, regardless of the borrowers situation.  Let’s further look into who can be a guarantor and what it means.

Who Can Be a Guarantor

A guarantor must be someone with a good, well-established credit history.  They must also have proof of steady income, or a substantial pool of wealth from which to draw if the borrower cannot uphold their side of the agreement.  There is no set criteria for loans with a guarantor, as they must be vetted by the lender for that specific loan agreement.

When Are They Necessary?

            A guarantor may be necessary in circumstances where the borrower has bad credit, or none at all.  Guarantor loans often come in the form of a parent guaranteeing a loan repayment between a child and the bank. It’s only natural that when starting out making larger purchases, like a car or a home mortgage, that your credit score will be low, which is the bottom line for the lending institution.  After a consistent period of payments and employment, a guarantor may no longer be needed and the loan can be adjusted accordingly. See more!

Risks Of Being A Bad Credit Guarantor

            As stated before, a guarantor insures the lender that they will make their money back; if not through the borrower, then through the guarantor themselves.  In other words, you may be on the line for the money owed.  Therefore, think carefully before entering into this sort of a deal.  Have confidence in the borrower, and make sure that you yourself can cover that debt if need be.  Additionally, think about the interpersonal ramifications.  Is this arrangement good for the relationship?  Is it good for both parties?

Other Things To Keep In Mind 

            As guarantor loans can be risky, there are a lot of factors to keep in mind.  These range from financial concerns to interpersonal.

      -Is It Necessary- The arrangement will deserve some scrutiny.  Is a loan the best viable option, or would it make more sense for the borrower to instead find another, more self-sufficient method.  This might be the case with a large purchase, but with one fixed payment, like a used car.

-Is This Good For Me?- Make absolutely sure that you can repay the debt if the borrower cannot.  Being approved as a guarantor is not the same as being confident that you can fulfill those responsibilities.  Take a close look at your finances, make projections and take into account hypotheticals.

-Can I Trust This Person?- Think rationally.  This person may be your family, or a very close friend, but that has little impact on the way they handle their own finances.  We would all like to help our closest friends and family out, but sometimes it’s just plain unwise.  Have a frank discussion with them, but make the choice by yourself based on their merits.

 

From here, you should have a better idea about whether it is a good idea to be a guarantor for an individual.  Before entering into Guarantor loans, make sure you have done your research on both the nature of the agreement and the character of those involved. Click here for more information: https://www.entrepreneur.com/article/52732