At least once in your life, you might have been approached by either a family member, a close friend or partner with this – “Hey, I need to get this, can you be one of my guarantors?”
Some of us will gladly agree, be it out of the social contract or just plain trust. But what happens when that TRUST is broken?
To begin with, a guarantor is a person who guarantees to pay a borrower’s debt in the event that the borrower defaults on the loan obligation. A guarantor acts as co-signer by pledging their own assets or services in case the original debtor is unable to perform their obligations. A guarantor is also known as a surety.
Guarantors are essential especially for loans that are way above the budget of the borrower. In order to allow such loans to go through, most financial institutions will ask the borrowers to have a minimum of one guarantor as an act of surety.
Prior to agreeing as a guarantor, always do your due diligence and know exactly what you are getting yourself into. As much as you want to only see the best in everyone, know exactly what will happen to you when the person you become a guarantor to choose to disappear. Know the legal proceedings that you will most likely to be going through should this scenario happen.
Should the person you become a guarantor to defaults their obligation, you automatically become the point of contact.
Based on the scenarios faced especially by our clients, those who fall into debt because of others are because they acted as a guarantor for their closed ones without doing their due diligence. Instead, they blindly sign those contracts and somehow found themselves still carrying such burdens for years, while the relationships strained or severed despite their circumstances.
So, before you start putting the pen to paper, here are some tips on what to look out for before agreeing as a guarantor, no matter who it is for:
1) Note the amount of loan that the borrower is getting. Ask yourself – can you actually afford to pay this installment monthly on your own.
2) Do a reality check – set the trust and relationship aside. Learn more about the borrower. You need to know the answers to the following:
- Does the borrower have other liabilities or loans aside from this one?
- What is his/her payment habit like?
- Does he/she have a stable source of income or will they quit this job again?
- Can you recall them purposely defaulting or not paying off any forms of loans with anyone or anywhere else?
To be safe, you may even request to look into his/her credit records. Remember, going through his/her financial background does not mean you do not trust them. It means that you are protecting your financial future – getting a clearer picture of exactly who you are risking your financial credibility to.
Should they find you doing your due diligence a hassle and start straining their relationship with you, that should be enough of a preview of what might happen in future, should they start facing difficulties paying off their loans. No matter who it is, that is a clear warning sign.
3) Read the contracts properly. At which point will you start to be liable for the loans? Some contracts might hold you accountable even though your borrower have not even been defaulting in their payments.
Always be 100% sure and know what you are getting yourself into. Your credit records, cash flow, future loan or grants opportunity, budget and even your relationship with the borrower is at risk.
So, let’s talk worst-case scenario. What if the trusted one just decide to stop paying his/her dues?
What you will be facing: Creditors will start contacting you in order for them to get you to start making the payments. You are most likely looking at non-stop calls, followed by letters of demands flooding in.
When you begin to default in the payments, one possibility is that the creditor can obtain a court order for seizure of any personal property of which you own, which can be sold off in order to pay for the debt.
Another possibility is that the creditor obtains a Garnishee Order, allowing them to automatically deduct the debt amount from your monthly salary.
The last thing they can do is to proceed with a bankruptcy application for you.
Ask yourself – are all these implications worth it? Some of the things that may be jeopardized in future for you includes signing up services that require monthly payments such as mobile phone lines, credit cards, vehicle loans, housing loans and whatever potential loans you might need in future.
If what you see does not seem ideal, one way to avoid being a guarantor is by telling them the truth:
Bro, you mean way too much to me – I don’t want any money issues between us to ever ruin our relationship.
Trust your instinct upon doing your due diligence. Too many of our clients end up in serious debts, unable to pay for loans they did not even take. Some for friends that no longer exist in their lives, or even relatives that have now shun them away.
If you find yourself facing heavy debts because of these issues, drop us a message or contact any of our consultants to assist you.