Agreeing to become a credit guarantor and co-sign loan contract is merely generous and noble deed, especially considering the fact that people usually accept the role of credit guarantor to support financially their spouses, families and close friends. This is particularly important to those with low incomes and bad credit loans history, but in the need of financial support in the long run.
What does it mean to be credit guarantor?
Being a guarantor means that you are legally obligated to step in when a borrower defaults and to conduct repayment of the lent loan on borrower’s behalf. Since you will become liable for the refunding of the total unpaid sum to the lender, there are usually legal strings preventing you from avoiding these obligations. Breaking those rules will lead to various penalties and in the worst scenario to legal sanctions with long-term consequences. On the other hand, if your trusted borrower repays the lent loan in the stipulated time frame, you may be a credit guarantor without ever having to deal with it in any way. Which scenario will happen to you depends on numerous aspects, but being a guarantor has the potential to affect you in many ways.
Positive effects of being credit guarantor
The first and the most obvious positive effect of accepting to be someone’s loan guarantor is the opportunity to support someone financially, to help someone go safely through tough situations and to help someone invest into any form of new change in life. Since borrowers are usually closely related to the guarantor, being a guarantor often effects directly the mere guarantor. The best example is being a guarantor to the relative and assisting him in gaining the loan to invest into a new home. The home where you might spend time in the future. Also, if the lender, after all, turns to you to charge borrower’s unpaid debts, you can still save your credit score by sticking to the deadline and placing payments timely. This will go to record and show to your future lender that just because the borrower wasn’t reliable enough, it doesn’t mean you are too.
Negative effects of being credit guarantor
Unfortunately, there are more negative effects than positive ones. If the borrower defaults, the lender will go for your debit account and draw the required money regardless of your current balance check. If it happens that you are not capable of repaying this debt, the lender might auction your property and other assets to compensate for the missing money. This will certainly affect your current budget in a long run and it might even burden you with significant mandatory expenses per month. Also, if you default to repay the debts, the lender will report this fact and decrease your credit score, which will lower your future chances of getting loans lent for your own needs.