Things to consider before becoming a guarantor

Agreeing to be someone's guarantor on a loan is a selfless act. Men and women might seek a guarantor because their credit histories are short or nonexistent or because lending institutions view them as too risky to deserve a loan. However, the presence of a guarantor, a person who guarantees the loan will be paid should the borrower fail to live up to the loan's terms and conditions, can make the lending institution less skittish about loaning the applicant money and more likely to approve the application.

But agreeing to act as a guarantor on a loan application carries considerable risk that can come back to haunt the guarantor if a borrower cannot meet his or her obligations. Before agreeing to be a guarantor, individuals should consider a host of factors to protect themselves from being negatively impacted by a seemingly good deed.

* Your finances: A close and honest examination of your finances should be conducted before you even consider becoming someone's guarantor on a loan application. Can you afford to be burdened with someone else's debts? Is it worth risking your own credit score to be another person's guarantor? Since this decision may affect your own family, ask your spouse or significant other if he or she is comfortable with your being someone's guarantor, and consider the potential impact on your own children or other family members if the applicant does not meet his or her obligations. Putting your family's finances or future in jeopardy to be a guarantor is a risk that's likely not worth taking.

* Reasons for rejection: Lending institutions have various reasons for denying a loan application, and not all of those reasons should concern a potential guarantor. For example, young people without a significant credit history may find it difficult to secure a loan with a reasonable interest rate. In those instances, young people may ask parents or friends with good credit to guarantee their loan so they can get a lower interest rate and a more affordable monthly payment. If a short or nonexistent credit history is the only reason a person who can otherwise afford a loan asks you to be a guarantor, then that should make you more comfortable guaranteeing his or her loan.

But someone asking you to be a guarantor on a loan application because their credit history is poor should raise a red flag. In such instances, ask the person to explain in detail why his or her credit history is poor. If the answer is not satisfying and he or she does not provide a good plan to improve his or her credit going forward, then politely decline to be a guarantor.

* Borrower's personal finances: A person who asks you to be a guarantor should be ready and willing to grant you access to their personal finances before you make your decision. This includes a current copy of his or her credit reports and current bank statements, as well as a list of his or her monthly expenditures, including rent, utilities, food, etc. You can then do the math yourself to determine if the person is capable of making the monthly payments on a loan or if the loan will be stretching finances too thin. If a person isn't willing to provide their financial documents, then inform him or her you cannot be a guarantor on a loan application.

* Loan terms: Prospective guarantors should also get terms of the potential loan in writing before making their decisions. Such leg work should be done by the applicant, who should request that the lending institution supply a copy of the paperwork the lender would normally use for a loan with a guarantor.

Once a copy of the potential loan has been secured, examine it to determine the terms, including how long the loan will be and if there is an early release option. An early release policy releases guarantors from their obligations after a given period of time, such as a year. This is essentially an out clause for a guarantor that rewards the person if the applicant meets certain requirements, including making all of his or her payments on time. If the loan terms are not agreeable but you still want to be a guarantor, then help the applicant find a new lender to work with.

Agreeing to guarantee a loan for a friend or family member is a decision that calls for careful consideration of a host of different factors.