In both business and personal finance, the practice of using a guarantor as part of a loan request is widespread and common. In a nutshell, becoming a guarantor means that you take on some of the responsibility for somebody else’s loan.
It means that if that person defaults on their loan, be it a mortgage, business, or personal loan, you will be required to pick up the pieces and ensure that the applicant’s repayment terms are met. If you have a steady income and good credit, you may be asked to become a guarantor for a child, spouse, friend, or business partner at some point in your life.
While such arrangements are an everyday occurrence, they come with serious legal obligations that you need to be aware of before signing up for any such agreement. Read on to find out exactly what you’re signing up for as a guarantor.
You Are Responsible if the Borrower Defaults
The first and most important thing to note is that the guarantor retains full responsibility for repayment if the borrower defaults on the loan. This means that say, if your child has listed you as a guarantor for their mortgage and they miss their payments, the legal onus will be on you to step in and pay what is owed.
This might sound scary but as the mortgage experts over at Trussle explain in their guide to guarantor mortgages, this is an extremely common agreement for first-time mortgages. It’s a system that is designed to offset the risk for the lender and will only be made in the first place if the lender is confident that the guarantor will be able to step in if needed.
You Are Not Entitled to Anything Acquired By the Original Loan
One thing that guarantors are often shocked to find out is that they are not in any way entitled to anything acquired by a loan. Even if the borrower defaults and you have to cover the payments, that does not transfer ownership of an asset to you in any way, shape, or form. Your role as a guarantor is simply to provide a safety net for both the lender and the borrower. You do not have a right to anything belonging to the borrower or the lender related to the loan.
You May Need to Provide Collateral
In many guarantor arrangements, you will be expected to provide some kind of collateral for the lender, to prove that you can meet the obligations of repayment if needed. There are virtually no limits to what kind of assets can be put up as security. It could be your own house, or your savings, or any stocks and bonds you might have. In the past, guarantors have been known to put up smaller, high-value assets such as jewelry, antiques, and cars as collateral. This is just a way of neutralizing the risk elements for the lender.
To conclude, it is vital that you speak to a lawyer before signing any guarantor agreement. Although a guarantor agreement drawn up by a reputable mortgage provider or bank should not contain any nasty surprises, only a legal expert will be able to tell you exactly what you are signing up for.