Not everyone is aware that becoming a credit guarantor of another person means taking on a full contractual obligation to make payments when the borrower fails to do so.
A study by the Institute of Finance shows that the Latvian population lacks the understanding of guaranteeing liabilities. And, remarkably, it is the people who are late in payment that turns out to be the most willing to be the guarantor of even more distant relatives, friends, colleagues, and acquaintances, sometimes without much thought, saying that they need to help their fellow human beings.
Lenders are increasingly attracting co-borrowers
Rather than guarantors in recent times, which further underlines the nature of joint commitments. Namely, both the principal borrower and the co-borrower have the same rights and obligations under the contract, so that the guarantor or co-borrower is equally liable for the performance of the obligations under the contract.
“Commitment to a guarantee is a serious decision that requires careful examination of the circumstances as well as an awareness of the potential consequences. Becoming a credit guarantor of another person means entering into a full contractual obligation that includes making payments when the borrower does not make them himself. But it is the part of the company that itself has time-consuming payment difficulties and low financial literacy that also has the greatest lack of understanding of the level of guarantee liability, ”says Evia, an expert at the Will Ladislaw Institute of Finance.
In order to avoid giving yourself a helping hand by agreeing to be a guarantor with your peers, the expert recommends careful consideration of several issues before making a decision.
For what reason does a lender ask for a guarantor?
If this is because the borrower has had, or still has late payments, it is risky and requires careful consideration of the circumstances. The likelihood that the borrower will not make the new commitment on time and that the guarantor will also have to make use of his own funds is much greater. Similarly, when a borrower has insufficient income to borrow the large sum claimed alone. Unless it applies to the same household when credit is being sought for common goals. On the other hand, if, for example, one of the parents is engaged as a guarantor for the processing of a child’s study loan, such a step is considered justified.
What are the terms of the contract? The guarantor, like the borrower, must also be thoroughly acquainted with all the terms and conditions of the contract so that all potential consequences and potential liability, which the guarantor bears in whole or in part, are clear at the time of engagement.
How much total commitment can you make to your income?
Becoming a guarantor of another person’s credit can have a significant impact in situations where you want to take out a loan yourself. The amount of guaranteed debt affects your creditworthiness, so it is important to understand how much total debt you can commit to your income so that borrowing does not burden your financial situation.
Will you be able to repay the guaranteed loan? There are absolutely unexpected events in your life, so you should be prepared for a situation where you will have to take over some or all of your payments at the time you make the guarantee, even if the probability seems small at first. Before taking on a guaranteed obligation, you also need to look at your ability to repay these loans in the future.
Are you ready for a long-term commitment? It is not possible to cancel a guarantee agreement when it is signed. Consequently, the opportunity for rethinking is not given unless another guarantor is provided in your place and / or the change is approved by the lender and the borrower agrees to the change.