Should You Use A Friend As Guarantor For A Personal Loan?

Written by imoney

So, you want to jump start a small business or need to pay for your mortgage or bills?  Personal loans can be the fastest way for you to get what you need. They’re a convenient way to borrow money, and you can just pay them off in monthly installments with interest.

Unfortunately, needing one and getting one are two entirely different things. Banks in the Philippines are pretty strict in giving out loans and it can be a struggle to get one. They do thorough background checks and assessments and if you have a bad credit history or do not have a solid proof that you have the capacity to pay, then your loan application would most likely be rejected.

Nevertheless, if you can find a guarantor, then the likelihood for your application’s approval increases exponentially. The question is, who and how?

Why do you need a guarantor?

Loan applications get approved or rejected based on a person’s credit worthiness. Banks or lending firms are in the business of lending money but they want an assurance that the borrower can pay it back. Unfortunately, a bad credit score or credit history is proof that the borrower has a high risk of defaulting the loan. Even if you try other banks, you will most likely still end up with the same answer.

However, banks will give you a second look if you can give a collateral (land, home, or car ownership papers) or can find a guarantor with a good credit score. When you give a collateral, it means that the banks have the authority to take your asset away once you are unable to repay your loan.

Similarly, a guarantor works as an insurer of your credit worthiness as the debtor. Their presence reduces the risk of non-payment since they are liable to pay for the loan if you cannot do so since they signed the Guarantee Agreement.

Who can be your guarantor?

Before choosing your guarantor, you should ask your bank of choice to provide you with an accurate quote. Knowing how much the loan amount would be is necessary in ensuring that the guarantor you choose have the capacity to make the repayments, in the event that you are unable to do so.

Meanwhile, a suitable guarantor is someone who is aged between 18 and 75, with a good credit history, and can afford to make the monthly payments in the event that you can’t. Sometimes, banks might insist that your guarantor must be a homeowner, but this is not always the case. In most cases, as long as your guarantor is solvent — meaning that their current assets exceeds their current liabilities — he/she is eligible to be nominated as a guarantor.

Here are what you need to discuss with your potential  guarantor before you nominate him/her in your loan application:

1. Does the guarantor have the capacity to make repayments?

When nominating a guarantor, you both need to be sure that either one of you can afford to service the loan repayments – the basic qualifier for this is the income. Banks or any financial institutions that grant loans have specific minimum income requirement, and the guarantor that you will choose should meet that prerequisite.

Lenders look at your debt-to-income ratio and determine how much of your total earnings goes to debt repayments. As a rule of thumb, if you are already using 40% to 50% of your income to repay existing loans, your chances of getting another loan approved is quite slim.

2. Is he/she willing to pay your loan?

Mutual trust between you and your guarantor is essential. Your guarantor has to have absolute trust in you and your ability to maintain your payment schedule. And you also need to trust them to uphold their agreement to pay if you become unable to.

The guarantor should also have trust that you will make arrangements to pay them for continuing to service your loan agreement if you are unable to continue payments with the loan due to any unforeseen circumstances.

3. Can he respect the loan agreement?

Respect – yours for your guarantor and theirs for the loan agreement they sign on. If you are asking a family member or a close friend to act as guarantor, you need to be very respectful of them and their finances.

You need to let them know and make sure that you will do everything to stay solvent and maintain your payment schedule. Remember that if you do not maintain your end of the bargain, then you can say goodbye to your relationship with your guarantor. So make sure that you do not place them in a position where their finances are strained when yours are.

What to do if you can’t find a guarantor?

Most often than not, loans that require a guarantor are made for loan applicants who have a poor or thin credit history. In most cases, if you have a good credit history, you will most likely not require a guarantor or a collateral for your loans.

So, if in case you’re unable to find a co-signer who will legally commit to assuming the financial responsibility of your loan, you can reconsider your options and change your game plan.

• If you don’t urgently need a loan, work on building your credit: pay your credit card bills on time, settle your debts with other banks promptly, and keep a low credit utilization on your credit card limit (recommended at 30% of your credit limit).
• Make use of SSS or Pag-IBIG loans instead, if you don’t currently hold one.
• Find another type of secured loans: payday loans (using your company’s ATM card as a collateral) or secured bank loans (assets as collateral).

What guarantees can you provide your guarantor?

So you have found someone to agree to become your guarantor. What now? How can you make this easier for them? And how to make sure that they continue to trust you?

First, the guarantee must be in writing and must specify the following:

• the amount of money for which the guarantor is liable for
• the circumstances in which he or she might have to pay for the same
• how long his or her obligation will last

After that, it would be best to ask the bank if it is feasible to make the Guarantee Agreement for just one year, then renewable for the another year and so on. This way, if you’ve proven yourself to be a good paymaster, and the bank has assessed you as such, then you can release your guarantor from his or her obligation in a shorter period of time.

Another important thing to remember is to ensure that you provide your guarantor with all relevant documentation:

• the credit agreement so that they are aware about their obligations
• guarantee contract (a contract of guarantee must be in writing and must be signed, otherwise it cannot be enforced)

Make sure that you inform your guarantor within five working days of any change to the credit contract which either increases your obligations or shorten the payment period.

Ensure that your guarantor only provides a “secured guarantee” that commensurate the loan amount and not more than the amount of debt. This way, if anything goes wrong, they wouldn’t lose a listing that is worth more than the loan that they guaranteed.

Finally, provide a written agreement to your guarantor. Since your guarantor has no direct control over your loan repayments, you should give he/she some peace of mind by providing the following information:

• Keep him/her informed of any financial decisions that you will make throughout the loan tenure, or as long as he/she remains your guarantor.
• Update him/her on how much money you have in your accounts.

Managing your relationship with your guarantor

 

When it comes to money matters, whether it’s a friend or a family member, financial struggles can one way or the other cause a strain in a relationship. For guarantors who you don’t have a close tie with, it’s going to be even more uncomfortable to deal with.

When choosing a guarantor, one major factor should be your relationship with him or her – this is when friends become a more significant candidate. However, whether it’s a close friend or simply a willing acquaintance, your reputation will be at risk as much as your personal relationship if things go south. It’s going to be hard to juggle, but the foundation that will keep it from crumbling is simple.

• Keep  your guarantor on the loop.
• Be visible, don’t be off the radar.
• Don’t be afraid to bring up the topic if it’s appropriate.
• Return the favor when your guarantor’s needs call for it.

Applying for a loan with a guarantor is no different from borrowing money from a friend. Your guarantor will end up paying for your loan if you are unable to – it’s almost the same as lending money to you from their pockets. If you want the relationship with your guarantor to make it through your loan tenure, commit to your duty as a borrower and ensure you settle your debts promptly.

Remember this, nobody signs up as a guarantor really expecting to pay your loan off for you. As a common courtesy, as a borrower, you should ask yourself honestly, if you are really capable of paying the loan before you even look for a guarantor.

So, should you ask a friend to stand up for you as a guarantor? Mixing finances with friends can strain if not ruin friendship. Your friend could be the godmother to your child, but if you have defaulted a loan that your friend co-signed for, that’s going to be hard to come back from.

That’s why only have a friend stand up for you as a guarantor if you’re confident of your financial capacity to pay promptly. The same goes if the situation is the other way around. Make sure you know all the details before you agree to become a guarantor for a friend!

This article was first published in August 2017 and has been updated for freshness, accuracy and comprehensiveness.