There are instances where a lender evaluates the borrower’s credibility to acquire a loan and passes but the lender still is not thoroughly convinced. In this cases, a lender may require a guarantee that may help support the loan.
There are two types of guarantee that a lender may require. A primary guarantee and secondary guarantee. A primary guarantee is a common type of guarantee where a security in the form of an asset is placed as a collateral. A secondary guarantee on the other hand is a third person required by a lender to guarantee payment of the loan. Here are some of the obligations that a guarantor may have.
- Payment Liability
A guarantor’s extent of liability depends on the agreement. A guarantor’s liability becomes executory once the borrower defaults on the payment. A guarantor is not usually required unless there is default by the borrower that is present. Payment liabilities depend on what has been agreed on the contract. It can range from being liable only to the payment default or the entire loan depending on the borrower’s default.
- Good Credit Standing
One of the things that is required of a guarantor is of good credit standing. The guarantor will be a person who will assume the loan and a lender will want someone who is capable of repaying the money that has been borrowed. Even if the credit review of a guarantor provides results showing capacity to pay but credit standing isn’t good, it gives the lender a level of risk that may not be acceptable.
- Capacity to pay
A guarantor needs to show that they have the capacity to pay. They should have enough assets and their value should show that they can repay the loan in case of the borrower defaulting payments.
Being a guarantor is takes a lot of thought before agreeing to binding yourself to a loan. A few questions you might want to ask yourself before you proceed.
- Why does the lender require the borrower to bind a guarantor?
- Does the borrower have the capacity to pay for the loan?
- Is the borrower responsible with his past and present obligations?
- Are you willing to pay back the loan plus its interest and other debt costs in case the borrower is not able to pay?