Responsibilities of a Guarantor

First and foremost, a guarantor is essentially taking on the legal responsibility of making the repayments on someone else’s loan if they are unable to. This means that if the borrower is unable to make their repayments on time, the lender may approach you, the guarantor, to make the payment on their behalf. As such, a guarantor should have a good understanding of borrower’s financial situation and ability to repay loan.

Furthermore, as a guarantor, you may need to provide the lender with your own financial information.
This could include your income, expenses, and credit history. This information will be used to determine whether you are suitable guarantor and can be trusted to make the repayments if the borrower is unable to.

Risk of Becoming a Guarantor

The biggest risk associated with becoming a guarantor is the potential loss of money. If the borrower is unable to make their repayments, then you, the guarantor, will be legally obliged to pay back the loan on their behalf. This could lead to strain on your own finances. As such, it’s critical to evaluate the borrower’s financial credibility before agreeing to be their guarantor.

Another risk is the potential damage to your credit score. If the borrower defaults on their loan, this will reflect negatively on your credit history, making it more difficult for you to be approved for credit in the future. In the worst-case scenario, it could lead to bankruptcy or legal proceedings against you.

We’re finding that guarantor home loans are being removed at roughly the 3-4 year mark of the borrower’s loan as property values have increased higher than normal. It’s important to note that guaranteeing a loan is a commitment to the length of the home loan which can be 30 years. For a borrower to pay down 20% of the home loan with no equity increase, it could take up to 12 years on the minimum repayments to reach the 20% mark to remove the guarantor.

Steps to take before becoming a Guarantor

Before agreeing to become a guarantor, it’s important to do your due diligence. This could include checking the credit history of the borrower, reviewing their financial situation, and seeking legal advice if necessary. Additionally, you should only agree to become a guarantor if you are 100% certain that you can afford to repay the loan if the borrower defaults.

Conclusion

In conclusion, becoming a guarantor is a big decision that should not be taken lightly. While you may be helping someone close to you, it's important to remember that there are responsibilities and risks that come along with it. If you do decide to become a guarantor, always take the necessary steps to protect yourself, including doing your due diligence and seeking legal advice. By understanding the responsibilities and risks involved, you can make an informed decision that will be beneficial for both you and the borrower.