Have you ever been approached by someone to stand as his/her guarantor for a loan? A guarantor is someone who “guarantees” someone else’s loan or credit contract. What this means is that if for any reason the person taking the loan fails or is unable to pay back the debt, you as the guarantor will do so. A guarantor is equally responsible to ensure the repayment of the loan and provides the lender with a guarantee that he will honour the obligation if the borrower is unable to do so. Usually, it is a family member who asks for your help to stand as a guarantor on their behalf but nowadays people are also approached by friends and work colleagues.
It is very common nowadays for lenders to insist that the borrower produce a guarantor for a loan in order for the deal to be more solid and reduce the lenders risk of not being repaid the loan. The guarantor also runs the risk of being stuck with the liability of an unpaid loan.
There are many risks to being a guarantor for someone else’s loan. Some of these risks are:
- You may be called upon to make the repayments and legal action may be brought against you if you don’t – If for any reason, the borrower is unable to make the repayment of the loan you, as the guarantor, are legally responsible. If you refuse or are also unable to repay the loan, the lender can bring legal action against you and the borrower jointly for recovery of the loan.
- It may restrict you when YOU want to borrow money – When applying in banks to borrow money, you have to complete an assets and liability statement. As a guarantor for someone else’s loan, you are responsible for making the repayments if the borrower can’t. Therefore in your liability statement, you must include the debt you are a guarantor for as you may be called at anytime to make the repayments. Because it is a real possible risk to you that you might be called upon to repay that loan, the bank will allocate some of your income to repaying the debt and your application for a loan may be declined because the bank has calculated that you can’t afford to repay both loans.
- You may have a fall out with the borrower but still be legally tied to the loan – Friends and family quarrel. It happens. You and the borrower may have a major dispute for whatever reason and no longer wish to be associated with each other. However, the loan is still there and you are still the guarantor. You can approach the lender and ask to be removed but, depending on how much of the loan has been repaid, the lender can legally say no. You will still be tied to the loan and liable to repay it if the borrower defaults.
Despite the risks involved with being a guarantor for someone else’s loan, people still do it for many reasons. It is, however, advisable to consider several things before agreeing to be a guarantor. Why does the borrower need a guarantor? Do they have poor credit history and are likely to have problems making the repayments? Is the borrower responsible enough to have a loan? Is the loan a wise one? Is the loan for something the borrower really needs or is it for something they could save up for? Most importantly, would you be willing AND able to pay back the loan if the borrower can’t or won’t? If the loan required the guarantor to list something as security for the loan, what would you list and are you willing to risk having it repossessed if both you and the borrower are unable to repay the loan?
It is important to know that if the borrower defaults in repayment of the loan, the lender is entitled to come after the guarantor for repayment before going to the borrower if they think the guarantor is more likely to be able to pay up. Therefore, you must protect yourself before agreeing to be a guarantor:
- The guarantee MUST be in writing and signed by you – Before you commit yourself to guaranteeing someone’s loan, ensure it is in writing and clearly specifies the amount of money for which you are liable, the circumstances in which you might have to pay and how long your obligation as guarantor will last. Once you are satisfied with the written terms of the guarantee, ensure you sign it.
- Try to limit your liability – Some guarantees of bank loans may cover all of a borrowers obligation to the lending bank. This means that if you agree to guarantee one thing, like a car loan, you may also unknowingly be guaranteeing other loans of the borrower such as personal loans, mortgage, etc. You must specify that the guarantee is limited to the amount you have agreed to guarantee.
- Make sure you receive ALL the relevant documentation – Make sure the lender gives you a copy of the loan agreement so that you may know the payment schedule as well as the guarantee contract and any other relevant document involving the loan.
The lender must give you proper notice within a reasonable period of any change to the loan agreement which either increases the borrowers obligations or shortens the payment period as well as any other relevant notices. If the borrower defaults in making repayments and the lender starts repossession processes, they must send you copies of the repossession process.
- Get a written agreement with the borrower – Insist that the borrower sign a written agreement with you that requires him to keep you informed of their financial decisions until the loan is paid off, allows you to see how much money is in the borrowers account and states exactly who is responsible for which part of the loan.
Before you commit yourself to being a guarantor, you need to make sure you know the borrower very well and that the borrower has the financial ability to repay the loan. It is not advisable to agree to be a guarantor solely out of sentimental reasons as you are responsible to repay the loan if the borrower defaults. Make sure you can handle the additional debt burden.
Some people stand as guarantors for their spouses. If, for any reason, the couple divorces, the divorce decree should list the obligations of each party and who will be responsible for the payment. The guarantor may use this to have his name removed as guarantor.
It is generally risky to stand as a guarantor so one should do so with eyes wide open.