Things you must know before agreeing to be a guarantor for a loan
If a friend or a relative asks you to be a guarantor for a loan, it is hard to break free from the obligation. However, before agreeing to be a guarantor, it is safe to know the terms, conditions, and responsibilities.
A guarantor on a loan is the person who pledges to repay the loan to the lender if the principle borrower defaults. Lenders usually insist on a guarantor when the borrowing amount is high or if the original borrower has a sketchy credit profile.
Read the terms before signing
A guarantor must not sign loan related documents before reading and understanding the terms and conditions.
Step back if you are not comfortable with any of the clauses of the loan.
Do not give your identity card or passport to anyone other than the lending institution.
Asses the capability and purpose of the borrower
It is a wise decision not to become a guarantor unless you know the person's credibility and capability.
Be informed about the borrower's utility with the money and the intentions.
Impact on your credit history
If the person for whom you are guaranteeing the loan defaults the payments, it is highly probable that it will affect your credit history. You might end up with a bad credit report, barring you from borrowing money for several years. Hence, keep a track of the repayments of the loan.
Substitute Guarantor
If you want to opt-out as a guarantor for a loan, you can find a substitute and approach the bank. If the lender is comfortable with the credentials of the substitute guarantor, you would be relieved.
Additional loan
If the borrower has taken an additional loan without your consent over the original amount, you may approach the bank to relieve you. However, you will still be the guarantor for the outstanding original amount.
Seek legal guidance
If your personal relationship with the borrower breaks down after a period due to some misunderstandings and there is a default in the repayments. You can seek a legal help from a lawyer to avoid such tricky situations.
If you have pledged your assets as a security for the loan, the lender can auction the same to recover the outstanding. However, you can fight your case through the legal system, if your property is under construction.
A friend in need is a friend indeed! However, it is better to take precautions rather than putting oneself at risk.