Pros and Cons of Becoming a Guarantor

Having a guarantor is just one of the ways a person with bad credit can take out a loan successfully. If you’ve been asked by someone to become their loan guarantor, here are the advantages and disadvantages that you should know about.

Pros

Perfect Way to Extend Your Help without Lending the Money Yourself

It doesn’t feel good to refuse a friend or someone in your family who wants to borrow cash from you, even if they aren’t the most reliable person in terms of money. If you can’t afford the amount they’re asking for, being their guarantor is just as good as lending the cash yourself, and you don’t have to break the bank to do it.

Can Help Improve the Credit Rating of the Person You Guaranteed for

One of the best parts of being a guarantor is that you can actually help the debtor improve their credit rating. If you lend the money yourself, there’s no effect on their credit whether they pay you or not. Meanwhile, by getting a loan from actual businesses, all of their actions involving the said account will be reported to credit reference agencies. This means that if they pay back the debt on time, this will reflect positively on their credit report.

Gives the Person You Guaranteed for Some Level of Responsibility

Let’s admit it. Sometimes when we borrow money from someone we know personally, we tend to feel at ease. Most of the time, the loan is interest-free, and we most commonly hear them say “Just pay back once you have the money.” Because of this, there’s a tendency to take our time when making payments, since there will be no interest anyway, and we tend to assume that the person who lent us money don’t need it anytime soon.

The same may happen when you lend to someone that is close to you. The person may not feel pressured to pay back immediately as opposed to when they borrowed from real lenders who will charge them for every late payments they make.

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Cons

You Will Have to Undergo Credit Checks

As you guarantee for someone’s loan, you are taking the burden off their shoulders and save them from having to go through credit checks, but in return the check will be made against you. This means you will probably have to submit more paperwork than the actual applicant, including proof that you are financially capable of being their guarantor.

You Will Have to Shoulder the Cost if the Borrower Defaults

Probably the biggest risk that comes with being a guarantor is that you will have to take responsibility over the applicant’s actions and will have to suffer the consequences if they choose not to pay. This is because as a co-signer, you are legally bound to cover any of their shortfalls to the lender.

There’s the Possibility of Broken Friendships/Relationships

How many friendships or relationships have broken over money? Be sure that the person you’re helping has high enough respect towards your relationship that they will never even think about turning their back against their obligation.