Crystal called our offices and was very excited about Paul, her boyfriend, asking her to be his guarantor on his home mortgage. She had told him she would be honored and felt that this was a step in the right direction. We advised Crystal to talk to a family member about whether or not this was a good idea. Crystal’s father emphatically said, “no” to the idea. Crystal called back and was confused. She asked, “What happens to a guarantor on a loan under a foreclosure?” Well, Crystal, it isn’t a pretty sight. However, you can help out Paul while still protecting your own credit and investments.
What is a guarantor anyway?
A guarantor is a individual or group that is willing to make a guarantee on another borrower’s loan. A guarantor is the best friend a borrower can have. The guarantor basically says, “this is a responsible person and I will bet my good credit on it.” If you are a guarantor, you have risked your own financial standing to vouch for someone else and to take responsibility for their loan should they default.
When a person defaults on a loan, if there is a guarantee, the bank goes to the guarantor to get the money from them. After all, they said they were good for the money if their friend couldn’t make the payments.
What happens if the guarantor says, “I didn’t sign up for that!”
If the guarantor refuses to make good on the guarantee, then the lender will sue the guarantor, not the borrower. The lender will sue the guarantor personally, which could result in the guarantor losing his or her personal property.
In recent times we have seen media exposure about guarantors who have escaped their obligations under guarantees. They have escaped these obligations by making the case in Court that they didn’t fully understand what they were doing when they agreed to the guarantee.
Since then, lenders have grown wise to this argument. Any guarantee you sign will be enforceable today. If you are considering being a guarantor, you should get legal advice and financial advice before you do anything.
Guarantors can fight back, but often come up empty-handed
As a guarantor, Crystal would have the right to sue Paul if she was forced to pay his debt. However, if Paul can’t pay his debts, how will he be able to repay Crystal?
The best advice
The best advice in Crystal’s case is for her to offer to guarantee up to a certain amount, but not the full amount. This is becoming a much more popular and safer proposition for many would-be guarantors because their risk is less, but they are still able to help out someone they care about or trust.
Sometimes the limited amount becomes the deal-breaker for the borrower. The borrower often does not have enough money to cover the loan and if the guarantee is limited, then they are forced to back out of their loan application.
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