By acting as a guarantor, this person provides an additional layer of security to the lender, as it reduces the risk of the loan defaulting.
Here’s a detailed explanation of how a loan guarantor’s liability works:
- Contractual Agreement: When someone agrees to become a loan guarantor, they sign a contract with the lender. This contract outlines the terms and conditions of the guarantee, including the extent of the guarantor’s liability. Typically, the guarantor’s liability is limited to the amount of the loan, but in some cases, it may extend to cover interest, penalties, and other charges.
- Primary Borrower Defaults: If the primary borrower (the person who received the loan) fails to make timely payments or defaults on the loan, the lender will first attempt to collect the outstanding amount from the borrower directly.
- Demand on Guarantor: If the borrower cannot or does not repay the loan, the lender may then turn to the guarantor to fulfill their obligation as per the guarantee contract. The lender can demand that the guarantor makes the payments on behalf of the borrower.
- Full or Partial Liability: Depending on the terms of the guarantee contract and the laws of the jurisdiction, the guarantor’s liability may be either full or partial. In some cases, the guarantor may be responsible for the entire outstanding loan amount, including interest and fees. In other situations, the guarantor’s liability may be limited to the principal amount of the loan.
- Legal Recourse: If the guarantor refuses to fulfill their obligation, the lender can take legal action against the guarantor to recover the outstanding debt. This may involve filing a lawsuit and obtaining a court judgment for the amount owed.
- Financial Consequences: If the guarantor is held legally responsible for the entire loan amount and fails to pay, their credit score will be negatively impacted, and they may face other financial repercussions. Additionally, the lender may take legal measures to recover the debt, such as garnishing the guarantor’s wages or seizing their assets.
- Release of Guarantor: In some cases, the guarantee contract may include provisions for the release of the guarantor. This could happen after the borrower demonstrates a history of timely repayments or if the outstanding loan amount is reduced to a certain level. However, the release of a guarantor usually requires the lender’s approval.
It’s important for anyone considering becoming a loan guarantor to fully understand the potential risks and responsibilities involved. Before agreeing to become a guarantor, individuals should carefully review the terms of the guarantee contract, seek legal advice if necessary, and assess their own financial capacity to fulfill the obligations of the guarantee. It’s also worth noting that the laws related to loan guarantees can vary from one jurisdiction to another, so the specific rules and regulations governing guarantors will depend on the applicable laws in the respective region.