The word Guarantee is defined by the Oxford Dictionary of English as “An undertaking to answer for the payment or performance of another person’s debt or obligations in the event of default by the person primarily responsible for it”.
LoanGuarantee can be of two type.
1. Loan Guaranteed by an individual.
2. Loan Guaranteed by a corporate.
A person providing guarantee for a loan taken by an individual must have met certain criteria specified by the lender. The lender in most cases are Micro Finance Lenders that does not have hold on the salaries of the borrower, but will required another individual that meets some specified criteria to provide additional comfort for the loan.
A family member or friend may ask you to guarantee a loan especially if they’re borrowing from a Micro Finance Bank. Before you agree, it’s important to understand how much he or she is borrowing and what your responsibilities are as a guarantor.
Understanding What it Means to Be a Guarantor
There are many misconceptions about what guaranteeing a loan means. It’s important you know exactly what you’re agreeing to before you sign as a guarantor..
Guarantee is not a character reference.
As a guarantor, you have provided confidence to the lender of repayment of the loan. If the borrower does not make the required payments, you must make them. You will also be responsible for paying any interest or fees, including costs of recovery of the loan and other legal fees.
Another misconception is that the lender will pursue the borrower for repayment first.
That is not true. If the borrower stops making loan payments, lender can collect the debt from you without trying to get it from the primary borrower first. They can pay in your post dated cheques without notice or take you to court to get repayment of the debt.
If the borrower declares bankruptcy, the debt is still not forgiven.
Not true, even if the court discharges a debt for the borrower, you are still responsible for paying the full amount of the debt plus any interest and fees unless you also declare bankruptcy.
If the borrower stops making payments on the loan, the lender will not need to notify you before demanding payments from you immediately. Many lenders don’t alert the guarantor until the loan is in default, which can significantly increase the amount you owe through interest and fees.
Before you provide guarantee on a loan, think carefully about the risks and what the loan can do to your finances.. It’s not just about helping someone out, it’s about your own financial wellbeing too.
Read also: Questions a loan officer will ask you