When people have bad credit, one of the best credit options is guarantor loans. In this case, the bank is guided by the creditworthiness of the guarantor as opposed to the borrower. However, what do you do when a close friend asks you to guarantee him/her a loan? Well, this is a monumental task. Before appending your signature and committing to the credit, here are several things you need to know about guarantor loans.
People who can act as guarantors
To guarantee a loan to a friend, you should not be financially linked. For example, a spouse cannot be a guarantor. Therefore, if the borrower is a friend, colleague, family member, or any other close person, you are free to guarantee the loan. Remember that your credit will be checked as if you are the borrower.
The risks of being a guarantor
When you agree to become a guarantor, it means that you are taking full responsibility to repay the loan if the borrower defaults. The lender will slam you with the remaining part of the loan plus any accruing interest. In many cases, banks will come to you even before following the borrower. Some lending institutions may even take you to court.
How to limit your liability
In many cases, guarantor loans are all obligations which mean that you commit to the full amount. If the client defaults, you will be required to clear the remaining amount. However, you can limit the amount you guarantee to the borrower by asking the bank for a limited guarantee.
Your relationship with the borrower
When you guarantee a loan to a friend, it is a requirement that you get a copy of the agreement to know all the terms and agreements. However, since you do not have control on how the borrower uses the money, it is advisable to insist on a binding agreement requiring the debtor to inform you of every financial decision related to the loan. Besides, the debtor must agree to show you the amount in his/her accounts and indicate which part of the loan you are responsible for.
How guaranteeing a loan affects your credit score
While being a guarantor does not directly affect your creditworthiness, the score can be damaged if the loan agreement defaults. A copy of the loan agreement will appear on your credit report and risks pulling down your score if you cannot clear the remaining amount promptly. There is a greater danger to your creditworthiness if the lender drags you to court.
The most important things to consider before becoming a guarantor
Before you agree to guarantee a loan to a friend, it is important to establish why he requires a guarantor. In most cases, it is because of bad credit. Guarantor loan reviews indicates that if a borrower has a poor credit score should, it should raise a red flag and need for extra scrutiny about his commitment to clearing the loan. Other important things to check and ask include;
- How responsible is the borrower?
- Why is your friend borrowing? Can’t he/her just save?
- What assets can you commit as a guarantor?
- Seeking legal advice if you are unsure about it.