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Is Becoming A Loan Guarantor For A Family Or Friend A Wise Decision?

Family and friends can be an important part of your life as they help you through your ups and downs by guiding you with the knowledge and experience they have, and you do the same for them. There can be one of the days when your family or friends may ask you to be a loan guarantor for them while acquiring a loan with the help of a mortgage broker in Brisbane. Now, as much as they need you to help them, you should think that the matter of money takes seconds to ruin or break a relationship. Therefore, before making a decision, ask yourself some of the questions mentioned below to make sure that you are not making a wild decision to help your close one get a first home owner grant or a home loan in general. 

Questions To Ask Yourself Before Becoming A Loan Guarantor

Why Does A Bank Ask For Guarantors For A Loan?

Banks do not ask for a guarantor for loans to all applicants and all types of loans. As secured loans are generally protected because of the collateral put up against the loan, such as a home loan or car loan, the bank does not ask for a guarantor for these loans. This means the bank only asks for a guarantor when the applicant applies for an unsecured loan with a low to average credit score, weaker financial position, high debt-to-income ratio or inadequate income. By asking for a guarantor, the bank ensures the coverage of the issued credits from risky borrowers. 

What Is My Potential Liability?

There are two types of loan guarantors, one of which can be your potential liability. These two loan guarantors are financial and non-financial guarantors. 

The financial loan guarantor becomes responsible for repaying the full legal amount of the loan if the primary borrower fails to do so. This means that if the primary borrower fails to make the payments, the bank will ask you to repay the outstanding amount with the help of a finance broker in Brisbane

A non-financial guarantor is only responsible for acting as a communicator between the bank and the borrower to ensure a smooth recovery process. The type of guarantor is usually asked for in case of an NRI loan so that the bank can always reach the borrower through a local point of contact. 

How Can It Affect Me?

As mentioned earlier, being a loan guarantor, you will be responsible for repaying the outstanding loan amount that the borrower was unable to pay. In case you fail to repay the loan, the bank holds the full authority to claim and sell your property to recover the payments. 

Not only this, but your history of delayed payments and defaults will affect your credit score, risking your chances of getting a home loan. A credit score is one of the factors to evaluate before considering home loans, and it can be highly affected by being a loan guarantor. 

Why Does The Borrower Require A Loan Guarantor?

As per the earlier discussion, banks usually do not ask for a loan guarantee when the loan is secured with collateral from a finance broker in Brisbane. However, when the borrower has a low credit score with no collateral to put up against the loan, the loan becomes unsecured, which is why the bank asks for a loan guarantor. Therefore, before deciding to become a loan guarantor, make sure to check the reason the bank asked for a guarantor and take a look at the creditworthiness of the borrower.
Becoming a borrower can mean putting yourself at risk. Therefore, it is essential to think it through before making a decision. If the borrower seems to be able to repay the loan amount with the help of a mortgage broker in Brisbane, you can consider becoming their loan guarantor. However, if that is not the case, then it is better to step back before you get yourself stuck between a potential liability.

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