What Is the Meaning of Guarantor?
If you've ever been asked to have someone cosign a loan for you, then you've been asked for a guarantor. Financial institutions provide loans based on assessed credit risk or the confidence they have in the applicants ability to repay the loan. When the financial institution determines the risk of lending credit to the original applicant is too high, they will ask for a cosigner or guarantor on the loan.
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Practical Example
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A college student, with little or no credit history, is a prime candidate for a guarantor. If the student falls behind on payments or completely defaults on the loan, the bills will be sent to the guarantor. In most cases, this will be the parent, who will then be liable for whatever payments remain on the loan.
Need for Guarantor
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College students are just one example of when a guarantor is requested, however. In many other cases, lending institutions will ask for a cosigner or guarantor on a loan. For example, if the applicant has no credit or a poor credit history. The applicant himself may seek out a guarantor before applying for a loan, because they are unwilling or unable to get the loan on their own.
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Choose Carefully
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When choosing a guarantor it's important to ask them about their credit history. Their credit is evaluated along with the applicants as part of the loan process. It's possible to have a guarantor and still get disapproved for a loan.
Considerations of a Guarantor
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If asked to cosign a loan and become a guarantor, be sure and ask the applicant for all their credit information. In other words, what is their income, expenses, and debts, as well as their credit history. Even if you're confident in the ability of the primary applicant to pay off the loan, ensure that you have the funds to do so if necessary. Also, ensure that you fully understand the terms of the loan and have a complete copy of the contract.
Guarantor's Liability
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Should the original applicant default or miss a payment on the loan, the guarantor assumes complete responsibility for the account. In the case of a missed payment, this means making that payment and all further payments until the original applicant is able to do so. In the event of the original applicant defaulting on the loan completely, the guarantor assumes all liability for paying off the loan. As a guarantor, it's important to emphasize to the original applicant to keep you appraised of any late payments or inability to make payments on the loan. This way, as the guarantor, you are prepared to take over and prevent any late fees or poor credit marks as a result.
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References
- Photo Credit a man and a woman with documents image by Sergii Shalimov from Fotolia.com
