Important to know for a guarantor
Important to know for a guarantor
A loan is a great way of improving one's living standards and making plans come true. However, it is important to keep in mind that such a step also means long-term obligations. Often a guarantor (also called 'surety') is required in borrowing, making it essential for the guarantor to know and understand, before entering into a guarantee agreement, what it means to act as the guarantor i.e. what are his rights and obligations.
Why is a guarantor necessary in borrowing?
- In order for the borrower to receive the required loan amount, the bank must assess his capacity to repay it. The potential borrower's income, expenses and other factors are taken into account in making sure that he will be able to meet his future obligations. At times, the bank comes to a conclusion that the borrower alone won't have the capacity to perform the obligations. Such situations may be resolved by bring in a guarantor. Then, the lender has two related persons responsible before him - the borrower and the guarantor. The solvency of the potential guarantor is assessed by applying the same criteria as that of the borrower.
- That way the risk of delays in regular loan payments is reduced. Under the guarantee agreement, the guarantor agrees to be bound by the same obligations as the borrower (that must be borne in mind at all times). If the borrower fails to make loan payments as they fall due and payable, they will have to be met by the guarantor.
In situations where the borrower starts to struggle and fall behind with loan repayments, they must be made by the guarantor according to the loan repayment schedule (the payments are debited from the guarantor's account). Sometimes the guarantor may feel unpleasantly surprised because he has forgotten about his obligations or was not aware of them at the time of signing the guarantee agreement. The guarantor, therefore, should keep in mind that he will be treated by the lender in the same way as the borrower. To avoid any misunderstandings, the guarantor should be informed about the course of loan repayment and know his rights.
What the guarantor should be aware of
- The guarantor's guarantee for the borrower's obligations will last until full performance of them;
- The guarantee applies to all obligations under the loan agreement to full extent;
- The guarantor is jointly responsible with the borrower to the bank for the loan. Consequently, the bank may demand that all obligations be performed by either the borrower or the guarantor;
- If the borrower fails to comply with his obligations, the bank has the right to withdraw unilaterally from, or step out of, the loan agreement and demand early performance of the borrower's obligations. Such a demand will then also apply to the guarantor.
Consequences of failure to repay loan
It is crucial to be aware of the consequences of defaulting on loan payments in situations where the borrower starts to fall behind loan repayments and/or loan interest payments. It also affects the guarantor. It is, thus, essential to act responsibly towards the contractual obligations. By keeping track of how the loan is repaid, the guarantor may spare himself any unpleasant surprises. For more on the consequences of failure to repay loan, see here.