Have you ever been asked to act as a guarantor for someone else’s loan? Often it is a partner or relative who asks, but nowadays it can also be friends or work colleagues. And, if it is for your family members, you will find it difficult to refuse.
Being a guarantor can actually be a great way to help someone you know to take out a loan when needed. A guarantor acts as a third party offering security for the loan, mainly through ownership of a property, and a strong credit history.
Related: 6 Ways To Improve Your Credit Score
While guarantor loans are a valuable way to help the borrowers, there are some risks that you need to take into account. Before you step in and agree to become one, you should understand the risks and see whether or not you are comfortable with it. Let’s look at 3 noteworthy risks that you must be aware of.
1. It can affect your future loan prospects
Generally, when you act as a guarantor, you are responsible for making the repayments if the borrower fails to do so. By bearing the guarantor’s responsibilities, your eligibility for new loans automatically gets reduced. What’s more, you may face the situation where your own loan gets declined, because the bank may have calculated that you can’t afford the repayments on both loans if you are required to do so.
In the worst case scenario, you may have to fully repay the loan if the original borrower defaults. And if you refuse to pay, you will also be declared as ‘defaulter’ and the bank can exercise its various options to recover the amount owed, such as the seizing of your assets.
2. You risk bad credit history
Your credit report will display the fact that you are acting as the guarantor for a loan. In fact, the borrowing banks will already have had access to your credit report when you applied to become a loan guarantor. In the event where the borrower defaults, this will then be reflected in your credit report and the bank may come knocking at your door to recover the outstanding amount.
And what does this mean? Well, the next time you want to take a loan, you will struggle to borrow from any major banks as they generally do not lend to applicants who have a bad credit history.
3. You are legally tied to the loan, regardless of circumstance
Just as none of us can predict our own future, it is even harder to know what is in store for others. It’s not a nice thought, but unfortunate event do happen. Friends, colleagues, even family members, for whatever reason, can have a major fall out and no longer wish to be associated with each other. Some of the more common problems are divorces, business failure and trust issues.
So, what happens to the loan you ask? Since you are the guarantor, you can definitely approach the bank and ask to be removed. But, depending on the amount that needs to be repaid, the bank is legally entitled to say “no” to that because you are still tied to the loan and you will have to bear the responsibilities.
What should you do?
Now, don’t get us wrong! We are not discouraging you from being a loan guarantor, but we strongly recommend that you give it great consideration and thought. Talk to professionals if you feel uncomfortable, and never feel pressured into becoming a guarantor. Avoiding the risk of financial liability even at the cost of creating friction with your family members or friends does make sense in this situation.
Remember, by being a loan guarantor, you are not only risking your own, but also your immediate family’s future.
There are many issues to consider, but it shouldn’t stop you from offering to help if you really want to – just make sure that you understand the risks of being a guarantor and explore all the other options that you have. Consulting with the bank or lending agency prior to becoming a guarantor is vital to ensure that an agreement is drawn up where all parties understand the risks involved.
Before you sign up to be a guarantor, ask the party who's taking the loan if they're opting for the right type of loan. Loans that are more suited to the borrower's needs and repayment abilities will help lower the risk of loan defaults. At CompareHero.my, you can compare between and choose the best type of personal loans. For more information, click the link below: