A guarantor is somebody who agrees that they will be held partially or entirely responsible for a loan if the borrower is unable to make the payments. If you are thinking about becoming a guarantor for somebody, you should realize that you are performing a massive favor for them. You are making it possible for them to apply for a loan that they would not otherwise be able to apply for, and you are doing so at your own risk.
What it Means to Be a Guarantor
Some people misinterpret what this means. You are not merely acting as a witness to the lending process. You are making yourself liable for the loan. If the borrower fails to make their payments on time, you will be held responsible for the payments yourself. Unless the contract explicitly says otherwise, you could be held liable for the entire value of the loan.
Before you agree to do anything, make sure that you fully understand the situation. More than anything, you should understand why you are being asked in the first place. In many cases, it means that the borrower is unable to apply for the loan on their own because of a bad credit history. The bank might not feel that they are a trustworthy borrower. By acting as their guarantor, you are essentially stating that you trust them financially a great deal more than the bank does.
Ask yourself if it is really in the borrower's best interests to act as their guarantor. Yes, you may be making it possible for them to apply for a loan that they wouldn't otherwise be able to qualify for. That said, if they can't qualify for the loan on their own, it might not be worth applying for to begin with. Ideally, you will go over the borrower's budget with them in order to determine exactly how they will pay for the loan. If repaying the loan appears difficult with their income and expenses, it might be worth pursuing other options.
Simply having enough money to make the payments is not justification enough. Circumstances can change. The borrower should have flexibility. They might lose their job. They might want a different job. They might want to sign up for a monthly service. They might have children. Even if nothing else changes, people need extra money to spend on themselves just for their own enjoyment. Using money for nothing more than paying off bills can become dull, and eventually cause somebody to burn out.
Anything that you list as a security is at risk. If you can't afford to make the payments yourself, you could lose the property. Make sure that you fully understand all of this before you sign up as a guarantor.
What You Do for the Borrower as a Guarantor
Don't let all of the doom and gloom discussed above sway you if you truly want to help somebody who is close to you. You can be very helpful to somebody by acting as their guarantor. If you feel that it is worth it to put yourself at risk to provide them with these benefits, by all means allow yourself to help them out.
Primarily, by acting as their guarantor, you are making it possible for the borrower to gain access to a loan that they wouldn't otherwise be able to apply for. If the loan is for something important, not frivolous, it is often well worth the help.
In some cases, income might not have anything to do with their need for a guarantor. In some cases, it might be that they don't want to wait to save up a deposit. This might not make sense in the context of a car, but considering the number of years that it can take to save up a deposit for a home, it might be worth the help. Applying for a home loan without a deposit is expensive because of lender's insurance. Some banks now allow a guarantor to secure only a percentage of the value of the home, rather than making themselves liable for the entire loan, which significantly reduces their risks.
About the Author
Otto is a Mortgage Broker that has specialised in mortgage guarantees for over 7 years. His company, the Home Loan Experts, is now one of the top home loan broking firms in Australia.
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