Why avoid becoming a guarantor for anyone?
When applying for financing, the greater the payment guarantees provided, the greater the chances of the loan being granted. Here, guarantors are one of the ways to increase these payment guarantees and ensure that the financing operation is successful.
But becoming a guarantor is a way of guaranteeing or ensuring the fulfillment of financial obligations. And this means that the guarantor undertakes to meet the economic commitments of the guarantor when the latter fails to do so.
Being a guarantor, therefore, entails more risk than one might think. Although it could be understood as a generous act, the reality is that it is a decision to commit one’s present and future assets. It is always better to think about your financial peace of mind and that of your family before making nice with someone else, and ending up with a stain on your credit history.
“Family is there to support you” is a well-known saying that is sometimes a double-edged sword, especially when it comes to money.
Do you know what a guarantor is?
A guarantor is a person who acts as a guarantee that you will pay the debt or credit you request. That means, if the person or company that took the debt, does not pay, the institution that made the loan has the right to require the guarantor to cover the debt.
Yes, as you heard, by acting as a guarantor, the debt becomes yours and you have the obligation to pay it even if you have not spent the money.
Besides, if you have a good credit history, it is a risk to be the guarantor of a person who, beforehand, you know will look bad. Even if the debt is not for a lot of money, the stain of the debt on your credit history will haunt you until your family member, friend or you pay off the balance owed.
Risks of being a guarantor (if the debt is not paid)
- You will have to pay a debt that is not yours.
- The debt is recorded in your credit history.
- The institution that granted the loan will want to recover its money. So they will call you (at your home, your cell phone or the references you provided) in order to collect the debt.
- If the debt proceeds legally, you will have to face legal actions against you.
- You run the risk of seizure of the property held as collateral for the debt.
How to play safe?
The simplest option is to refuse to be a guarantor, if you do not have full confidence that the person will pay the debt in due time and form.
Maybe your acquaintances or relatives will take it badly. But as the saying goes “better safe than sorry”, not by helping someone else you are going to throw away the good reputation in your credit history.
Accepting solidarity in a debt, forces you to take a responsibility that is not originally yours, so think before you say yes!
I am Nikesh Mehta, owner and writer of this site.
I’m an analytics and digital marketing professional and also love writing on finance and technology industry during my spare time. I’ve done online course in Financial Markets and Investment Strategy from Indian School of Business. I can be reached at [email protected] or LinkedIn profile.