Being the guarantor might not seem like a big commitment at first – there’s no upfront costs, minimal time commitments and you are lending a helping hand. But beyond signing on the dotted lines, there are many pitfalls of going guarantor for a loved one.
Whether you have been asked to go guarantor for a car or home loan, it would be wise to carefully consider the following:
Guarantors must understand the responsibilities and repercussions of signing off as guarantor. If the borrower defaults on the loan, you will be liable for their debt as the guarantor. This can subject guarantors to a plethora of issues including a poor credit rating – making it difficult to receive credit for years, making repayments for the borrower and so on. Caution must be exerted when signing guarantees as open-ended guarantees may leave the guarantor exposed to more debt than initially understood.
Change Of Circumstances
Before going guarantor, take into account the implications that could arise if there is a change in circumstances, i.e., a relationship breakdown between yourself (guarantor) and the borrower, the borrower becomes divorced, your financial status is affected by unexpected health care costs or your business takes a plunge. Seek independent legal advice before signing as guarantor so you thoroughly understand your obligations and risks.
Alternatives To Going Guarantor
Although you may feel obliged to go guarantor, especially for close family members, it is not always the most feasible or favourable financial option. Consider alternative ways of providing financial support such as contributing to a deposit instead or providing a limited guarantee to only secure part of the loan.