If you're responsible with your personal finances and you have a high credit score, someone may ask you to be a loan guarantor. Signing as a loan guarantor can help another person, such as a child, sibling or other relative, acquire a loan. As a loan guarantor, you agree to repay the borrower's loan in the event of default. But before signing your name to loan documents, you should consider a few things.
Borrower's Financial History
The fact that the borrower couldn't obtain a loan on his own should raise red flags. Have a candid financial discussion with the borrower before signing as a loan guarantor. Why does he need a loan guarantor? If possible, review the borrower's credit report and assess his current debts. You're financially liable for the debt if the borrower stops paying. Assessing his debts provides clues as to whether a new loan will overextend him financially. If the borrower is unwilling to disclose this information to you, do not sign as a loan guarantor.
Early Release Policy
Talk with the lender before signing as a loan guarantor and ask about an early release policy. Some banks include this clause in loan agreements, which releases a loan guarantor after a certain period has elapsed. For example, if the borrower makes timely payments for 12 months, the bank may remove your name from the loan. This lowers your risk because your duty as a loan guarantor expires after one year.
Even if the borrower has good intentions, unforeseen situations can cause him to default on the loan. These include a job loss and illness. Before signing as a loan guarantor, talk to the lender about credit insurance. This is coverage that pays credit cards, auto loans, mortgages and other loans in the event of death, job loss or illness. If one of these situations occurs, the credit insurance kicks in and makes the payment for you.
Signing as a loan guarantor will have an impact on your credit report and score. While you're not the primary borrower and may never make a loan payment, this account will appear on your credit report. This increases your debt-to-income ratio and may create problems when you're ready to apply for your own loan. Debt-to-income ratio is your percentage of debt in relation to your income. Don't hastily agree to be a loan guarantor. Consider your plans for the future. Would you like to purchase a house or finance a car in the near future? Understand that signing as a loan guarantor can put your purchasing plans on hold — unless you have substantial income to support multiple loans in your name.
Valencia Higuera is a freelance writer from Chesapeake, Virginia. She has contributed content to print publications and online publications such as Sidestep.com, AOL Travel, Work.com and ABC Loan Guide. Higuera primarily works as a personal finance, travel and medical writer. She holds a Bachelor of Arts degree in English/journalism from Old Dominion University.