If you are a parent or a close friend or relative of someone who needs a co-signer for a loan, should you agree to it? What are the advantages and disadvantages of being a co-signer, or guarantor, of a loan? More often than not, this arrangement ends up being an acceptable one because the borrower continues to pay the debt until it is paid off. Sometimes, however, things go awry and the guarantor is forced to pay off the remainder of the borrower’s debt. Although this is rare, it does happen, which is why you should consider all aspects of a guarantor loan before agreeing to be a co-signer.
Why Do Guarantor Loans Exist?
For many people just starting out, it is difficult to obtain a home loan or even a credit card because they have little or no credit, or even bad credit. Many of them choose to get a co-signer or guarantor for their loan. This is an excellent idea on their part, because it allows them to qualify for a loan they might not otherwise have been able to afford. However, if you are asked to be a guarantor of a loan, there are some things to consider before agreeing to this arrangement. These include:
- Decide if you truly trust the borrower. If the borrower defaults on the loan for whatever reason, even if it is 20 years down the road, you will be responsible for the loan. This is something to consider before agreeing to be a guarantor.
- How would co-signing a loan affect your relationship with the borrower? It is always possible that the arrangement could go sour and you would be required to pay the remainder of this person’s debt. This could be particularly troublesome if the borrower is your child, close friend or close family member.
- The bottom line? Co-signing a loan for someone could affect both your credit and your personal relationship with the borrower, even years down the road. The main thing you need to do is ask yourself if this is truly what you are prepared to do.
There are some advantages to being a co-signer for a loan, and the main one is that the loan will show up on your credit report. This means that, provided the borrower continues to make payments on the loan, your credit score will be impacted in a positive way. Since most borrowers of guarantor loans do not default on their loans, this is a good way to benefit from their responsible behavior and receive a higher credit score.
Of course, many of the advantages of a guarantor loan belong to the borrower, who usually gets a lower interest rate and better terms overall by choosing to include a co-signer on the loan. However, regardless of the pros and cons of a guarantor loan, these types of loans should not be taken lightly. All possible scenarios – both good and bad – should be considered before signing on the dotted line, so that nothing unexpected will happen in the future.
