Risky Business: So You Want To Become A Guarantor?

Of all the things you can do with your money, taking a gamble to become a guarantor for a friend or family member ranks up there as one of the riskiest things. Sure, as a civic-minded person, you might want to pay it forward and help someone who could use your help, whether to get a student’s loan or purchase a car or even to rent an apartment. But before signing a guarantor agreement, you should be guided by all the facts in order to avoid possibly ending up in debt yourself.

What’s a guarantor?

You’ve heard the term so many times, but what exactly does the word “guarantor” mean? Most people understand a guarantor to be a responsible third party helping somebody else to get a loan if they are struggling to get approval from a creditor or lender. A young person who hasn’t been in the workforce long enough to have built up enough of a credit history may decide they want to take out a loan. What a guarantor would do is pledge his or her assets as collateral against the value of that loan. We also say this guarantor stands surety against the loan. But what many people don’t realise is that standing surety has another dimension than merely helping the person to secure the loan.

When you agree to guarantee the repayment of that loan, what you’re also agreeing to do is take on the burden of repaying the borrower’s debt in the event that he or she defaults on their obligation. This simply means that if the person for whom you became a guarantor finds themselves in a position where they are unable to pay their debt, then the lender has the legal right to demand payment for the outstanding monies from you. As well, if the borrower is habitually late in making payments, depending on the type of loan, it’s possible that the guarantor might have to step up and pay additional interest and penalty costs.

Guarantor versus co-signer

Some people mistakenly think that the terms guarantor and co-signer are interchangeable. They are not. A third-party guarantor simply vouches for the borrower and pledges to take responsibility for repaying the borrower’s obligations should the unexpected occur and they are unable to do it themselves. A co-signer, however, is essentially someone who signs along with the borrower and is equally responsible for splitting and making timely monthly repayments on the loan. A co-signer is therefore really a joint borrower. So, in the case of an apartment: as a guarantor, you would pay the rent if the tenant refuses to pay. That’s as far as your involvement goes. As a co-signer, however, you would split the rent and also live there.

What are the guidelines for becoming a guarantor?

In Jamaica, you have to be, among other things, a national or a citizen between 18 and 65 years old, resident in Jamaica for at least five years, gainfully employed for at least one year, with a tax registration number and not currently the guarantor of another existing loan (except in the case of parents, who can stand guarantee for more than one child at a time.) It goes without saying, the borrower must be known to the guarantor. Once these things are in place, the lender assesses whether you are financially sound by way of your credit history, your assets, your pay stubs, bank statements, and so on, depending on the amount of the loan, in order to determine your ability to provide collateral.

The bottom line

Wanting to help a young person find their place in the world is commendable, and it is important to remember that the majority of borrowers have honourable intentions. Maybe you yourself were the beneficiary of someone else’s largesse which gave you a start. Fact is, most guarantors will never find themselves on the hook for monies owed to lenders. Still, it is advisable that a potential guarantor seek to understand the extent of the financial burden that will possibly accrue to them before committing. Your credit history may be affected in the event of a default, possibly jeopardising your own chances for securing a loan in the future. One thing the ongoing pandemic has reminded us is that financial situations are fickle and can change in an instant. Smartly balance your desire to assist others with your need to remain on good financial footing.

Lamar Harris vice-president, wealth management, NCB Capital Markets

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