Becoming a guarantor does not just mean signing a piece of paper to help a friend or relative get a loan. It means that you will be legally liable for their loan payments if they are unable to pay. With this in mind, we always advise clients to consider every angle of what being a guarantor means before co-signing a loan. Here are some questions to ask before signing on the dotted line.

1. Can you afford to pay off the loan?

   That’s right; if they don’t pay you will have to. So, ask yourself if you can afford to make the payments for this loan if you run into guarantor issues.

2. Is the borrower financially capable of repaying the loan?

   This is something that can be hard to determine but there are usually some clues. If this is a person who is established with a good job, mortgage and family, it might seem at first glance they must be financially stable. However, these are often the people carrying the most debt.

   They could also be asking for a co-signer due to their poor credit rating. This is another sign they have had debt issues in the past and possibly still are. The flip side is, if this person has a low credit rating because they’ve never applied for credit, they might be dependable but just haven’t had a chance to prove it yet. In this case, the risk is far lower. Your safest bet is to do a credit check before signing or ask the lender and borrower to share their credit information with you. If the borrower won’t share info with you openly, this is yet another clue they are probably a risk.

3. What other reasons might I have to pay?

   Minor breaches of the terms of the loan agreement or changes to the borrower’s financial circumstances can also mean the lender demands payment from you. When there is a co-signer, it is far easier for the lender to go after you than it is to try to collect from the actual borrower. This is because you are both viewed as borrowers equally. Even if the borrower does not default on payments, if these breaches or changes to the agreement occur, the lender can choose to come after you for payments.

4. What if you can’t pay?

   Not being able to pay means facing the same consequences as not paying your own loans. You are on the hook and the lender can go as far as seizing your personal property to sell in order to cover the debt. They can also garnishee wages directly from your salary or apply to force bankruptcy. Bankruptcy is the worst-case scenario and will impact your life for years, making it impossible to apply for credit cards, loans and mortgages.

5. Are there actions to be taken against the borrower?

   You can always try to sue the borrower but that is often like trying to get blood from a stone. If they have defaulted on their loans in all likelihood, they don’t have any money or assets. Even if they have simply chosen to stop payments and are still financially sound, it will cost you thousands of dollars in legal fees to sue them. Of course, you can also try to recover those legal costs should you win the case.

   Becoming a loan guarantor cannot be entered into lightly. Guarantor issues will greatly impact your own credit rating and even lead to financial ruin should the borrower not be able to pay off the loan. Although it can work in some circumstances with a highly trusted friend or family member, it is never a good idea to just sign blindly before considering all these questions.

For more information about becoming a loan guarantor, call Charles Advisory Services at 416-915-9007 or contact us here.