In todays society we use various debt options to finance small and large expenditures and buy various different things as well as properties. In the case of short term online loans as well as credit cards usually lenders check the potential debtors credit history, his ability to pay his debts as well as his income size. These statistics are usually enough to create a complete picture of a persons ability to pay back a loan and is enough to make this decision to approve or not to approve the loan application. But if you need a long term loans like a student loan or a mortgage then usually the lender will ask for a collateral or a guarantor to secure this deal. This is done because lenders fear they you will not be able to repay your debt and that guarantor or collateral will be like an insurance policy that will lower the risk on their side. If the concept of collateral is usually clearly understood then the term guarantor is not that widespread and that is why in this article I will try to give you the basic understanding and explanation what exactly is a guarantor?
A guarantor is a company or an individual that is able to vouch for you in a 3 way agreement between you, a lender and himself. With this deal in the case of a bankruptcy when you will not be able to pay back your debt this person will step in and continue paying your loan. The guarantor usually is a trusted friend, family member or a close relative that has enough resources that he can vouch for you and sign off on a deal that is created by the lender. Of course as long as you are paying your monthly debt payments the guarantor has no interest in your loan but as soon as you stop paying those monthly payments the lender that usually is a bank or non-bank creditor will ask this person to continue paying that loan from where you left off.
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In most cases where guarantors are needed lenders understand that there is a high risk that the person who takes out that loan will not be able to pay it back and that is why they are asking to find this guarantor to create an insurance policy agains loosing their money. No one will ask you to find a guarantor if you are taking out a small loan but if you are trying to get a loan for more than 5000 Lari and with a repayment schedule that spans multiple years or even decades then there is a chance that this may happen. And from the perspective of the guarantor this is not a very pleasant transaction because you have to vouch with your own money for your friend and when money and relationships combine then that can lead to some very bad things. Of course there will be a point in the contract that will transfer not only the loan itself to the guarantor but also the property for what that loan is being paid. But if a guarantor is needed for a student loan then there are absolutely no benefits whatsoever to the guarantor and he/she can only loose money in the case that the debtor defaults.
I hope this will give you an introduction into this subject and you will think twice before you offer to sign off as a guarantor because even if in most cases you won’t have to pay, if your friend or relative defaults you will be forced to pay those monthly payments.
