In some cases borrowers might call in a third party to intervene especially when they have bad credit and lenders are turning their backs on them. The third party, also known as a guarantor comes in to satisfy the loan obligations of the borrower that keep them liable. This means that if the borrower fails to keep up with payments then as their guarantor will have to chip in and cover the payments. And that is why being a guarantor is an issue that calls for careful consideration of a host of different factors. If you are wondering where to start, worry not. Here is a list of the top things you need to bear in mind before signing that agreement.
Who the guarantee is to you
Before saying yes to a request to be a guarantor, you first need to look into who the guarantor is to you. This is because mutual trust and openness is necessary. It is much easier to open up to a friend, family member or close colleague about your finances than to a total stranger. Ensure you can trust your guarantee to keep their end of the bargain. After all you don’t want to lose all your savings and ruin a good relationship.
Additionally, you need to keenly assess the level of risk the borrower may have. To make a good assessment, request for some certain financial information from your guarantee; which they should be free to give. Some of the things to ask is what’s in their assets pool, how much money they earn and whether they have had a history of bankruptcy before. Remember, it is important to ask these questions now than later on when your savings are being wiped out to repay the loan your guarantee couldn’t meet.
The loan term
The other thing you need to think about before signing up to be a guarantor is the loan terms. It will benefit you to have a keen look at the terms and conditions of the loan agreement before plunging in to assist. Ensure you secure a copy in writing and carefully go through it. Look into things such as how long the loan term will be. Additionally, as a prospective guarantor, ensure the loan lender includes an early release option in their terms and conditions. Remember, an early release option is a plus for you as it allows you to pull out prematurely before the lending period is over if the applicant meets certain requirements. For instance, this is possible if your guarantee makes their payments on time.
All in all, it is important to make sure the terms and conditions of the loan agreement are suitable for your specific situation. If they are not, feel free to advise the applicant to seek another lender and offer a helping hand. Otherwise, you can seek a different alternative altogether if you both agree.
Plan for the worst case scenario
In most cases, applicants need guarantors when they have a poor credit history. This could also mean that they have some financial constraints. That is why it is important for both you and your guarantee to plan for the worst case scenario. It will be helpful to put down what you would do if unforeseen circumstances prevented them to make repayments. Remember to plan your finances and have a paying plan in the event you have to cover the loan for your guarantee. This calls for you to take a keen look at your own financial situation and the effect of accepting the offer might have on you.