Obligations of a Guarantor
Remember the glorious 1990s and 00s before the 2008 financial crisis.? A dormouse could apply for a loan or a mortgage and they would be accepted. People would be receiving letters from the bank every six months or so saying their credit limit had been increased by a thousand pounds or so – no questions asked.
Nowadays, getting a loan or a mortgage is much more difficult. Banks will perform a strict ‘affordability test’ to see if you can pay back the amount you borrow. And if you have a bad credit history or no credit history at all, the interest rates demanded can be crippling.
Therefore, many people are now asking parents and friends to become guarantors. But if you are approached, do you know what a guarantor’s obligations are, and whether you qualify to be a guarantor?
This article covers who can be a guarantor, guarantor requirements and things to consider, whilst letting you know your liabilities should the person you guarantee defaults on their loan/mortgage repayments.
What is a guarantee?
In terms of a loan, a guarantee is the legal promise of one person, known as the guarantor, to assume responsibility for another’s debt should they fail to make payments. Because of the risk involved, you need to be confident that the family member or friend asking you to be a guarantor can make the required payments to the creditor.
Guarantees for loans are normally required to remain in place until the loan is paid off. Mortgage guarantors, however, are not tied for the entire 25-30-year term of the mortgage. Once the owner has built up enough equity, they will usually be allowed to remortgage and the guarantee will be removed.
Who can be a guarantor?
To be a guarantor, you must be 18 years or over. However, in some cases, guarantors must be older than 21 years. In addition, the lender will want assurances that you have a good credit rating and can pay back the loan yourself.
Depending on the lender, further stipulations about who can be a guarantor may be made, for example, to qualify, a guarantor may need to prove:
- They own property
- They earn over a certain amount
- They have no other debts (a mortgage may be excluded)
- They do not share any other financial commitments with the borrower
Once you have agreed to be a guarantor, you cannot change your mind.
What happens if the person defaults on their payments?
The inherent risk of acting as a guarantor is that if the person you gave the guarantee for cannot pay the debt/mortgage, you are then liable. Make no mistake, if the borrower defaults, the lender will come after you and your assets. This can result in your credit rating being damaged, not to mention stress and sleepless nights!
How can I protect my interests if I am being asked to be a guarantor?
As Solicitors, we advise people to think very carefully before becoming a personal guarantor. To protect your interests and your blood pressure, take the following precautions:
- Do not act as a guarantor for a new partner or anyone who you do not know extremely well. Some people are experts at creating sob-stories, but if you act as a guarantor for a con-artist, you’ll find yourself put under tremendous amount of financial and personal stress.
- It is not good business sense to act as a guarantor on goods that diminish in value such as a car or electronic equipment. We promise, despite what they try and tell you, your offspring’s life will not be ruined if they must save to purchase a depreciating asset.
- Have a couple of month’s payments set aside in case the borrower runs into difficulty and defaults.
- If you are acting as a guarantor for a mortgage or business loan, always seek legal advice- a commercial property lawyer can help you with this. Banks and lenders are sharp and ruthless about getting their money and resulting interest back. And remember, if you are being asked to be a guarantor, it is because the lender has doubts about the borrower’s ability to fund their debt repayments. If you have only offered to guarantee the deposit of your child’s property purchase, banks will sometimes try and ‘persuade’ you to sign an unlimited guarantee as this serves their interests better. A Solicitor will quickly spot this in the small print and, normally after a bit of a dust-up, will ensure your liability is limited.
Becoming A Guarantor
Acting as a guarantor is a generous gift; for the borrower, it can be the lifeline they need to secure their goal. However, guarantees are serious commitments and can come with very complex small print. To ensure your interests and future prosperity and credit rating is protected, seek legal advice before you sign a guarantee agreement.
Guillaumes LLP Weybridge Solicitors are a personable full-service law firm. If you’d like some assisting regarding guarantor requirements, and who can be a guarantor, our property disputes lawyers can help protect your interests just to be safe. Our commercial property solicitors can also assist regarding a business premises. To find out more, get in touch with our legal professionals.