Before the loan has been funded, both parties will co-sign the loan agreement and the lender will usually make a phone call to both sides to ensure that all the terms of the agreement are fully understood. Therefore, the guarantor has a legal responsibility to cover the borrower’s repayments if they default. Even if the borrower has become bankrupt or in IVA, it is still the guarantor’s responsibility to make repayment. The guarantor must be prepared for unexpected circumstances to occur so they must repayment before accepting the agreement.
Since the lender has provided money upfront, they want to be able to cover their costs. Most lenders are able to offer forbearance if you give them notice that the borrower cannot repay so this can make the balance lower.
What should I consider before agreeing to be a guarantor?
Since there is a legal obligation involved with being a guarantor, it is important to consider various things before agreeing to this kind of responsibility including:
- Why does the borrower need a guarantor (do they have a poor credit history? Is it likely they will have problems making the payments?)
- Is the borrower responsible enough to have a loan?
- Is a guarantor loan the right choice for them (is it for something they really need, or could they just save up for it?)
- Would you be willing and able to back the loan (plus debt recovery costs) if the borrower cannot meet repayment?
- If in doubt, seek legal advice first.