Risky company: do you want to become a guarantor?

Of all the things you can do with your money, taking a bet to vouch for a friend or family member is one of the riskiest things. Of course, as a citizen, you might want to pay it forward and help someone who might need your help, whether it’s getting a student loan, buying a car, or even renting an apartment. But before signing a guarantor agreement, you should be guided by all the facts in order to avoid possibly getting into debt yourself.

What is a guarantor?

You’ve heard the term so many times, but what exactly does the word “guarantor” mean? Most people understand that a guarantor is a responsible third party who helps someone else get a loan if they are having trouble getting approval from a creditor or lender. A young person who hasn’t been in the job market long enough to have a good enough credit history may decide to take out a loan. What a guarantor would do is pledge their assets as security for the value of that loan. We also say that this guarantor guarantees the loan. But what many people don’t realize is that there’s more to being a guarantor than just helping the person secure the loan.

When you agree to guarantee the repayment of this loan, you also agree to assume the burden of repaying the debt of the borrower in the event that he fails to meet his obligations. It simply means that if the person for whom you have become a guarantor finds themselves in a situation where they are unable to pay their debt, then the lender has the legal right to demand payment from you of the sums owed. Also, if the borrower is habitually behind in their payments, depending on the type of loan, the guarantor may have to step in and pay additional interest and penalties.

Guarantor versus co-signer

Some people mistakenly think that the terms guarantor and co-signer are interchangeable. They are not. A third-party guarantor simply stands surety for the borrower and agrees to take responsibility for repaying the borrower’s obligations if the unexpected occurs and he is unable to do so himself. A co-signer, however, is basically someone who signs with the borrower and is also responsible for timely splitting and monthly repayments on the loan. A co-signer is therefore a co-borrower. Thus, in the case of an apartment: as a guarantor, you would pay the rent if the tenant refuses to pay. That’s as far as your involvement goes. As a co-signer, however, you would share the rent and live there as well.

What are the rules for becoming a guarantor?

In Jamaica, you must be, among other things, a national or citizen between the ages of 18 and 65, resident in Jamaica for at least five years, in gainful employment for at least one year, with a tax registration number and not currently the guarantor of another existing loan (except in the case of parents, who can stand surety for more than one child at a time). Of course, the borrower must be known to the guarantor. Once these are in place, the lender assesses whether you are financially sound based on your credit history, assets, pay stubs, bank statements, etc., depending on the loan amount, so determine your ability to provide collateral.

The bottom line

Wanting to help a young person find their place in the world is laudable, and it is important to remember that the majority of borrowers have honorable intentions. Perhaps you yourself benefited from someone else’s largesse that gave you a good start. The fact is that most guarantors will never find themselves liable for money owed to lenders. Nevertheless, it is advisable that a potential guarantor seek to understand the extent of the financial burden that may fall on them before committing themselves. Your credit history may be affected in the event of a default, potentially jeopardizing your own chances of obtaining a loan in the future. One thing the ongoing pandemic has reminded us of is that financial situations are volatile and can change in an instant. Smartly balance your desire to help others with your need to stay financially sound.

Lamar Harris Vice President, Wealth Management, NCB Capital Markets

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