Signing a loan document as a guarantor

Must I guarantee my friend’s loan?

Question: A friend asked me if I can sign on her loan document as guarantor. She’ll use the money to buy a small home in their province. What happens when a person signs as guarantor to a loan?

Answer: Banks and financial institutions grant loans to individuals who have passed stringent credit checks. These people are known to be of good character, have a good credit history, are not considered credit risks, and have proven themselves to have the capacity to pay, having a steady income from a job, business or profession.

Collateral is also often required in loans. This may be a real estate property, automobile, or securities owned by a person that may be required by the bank or financial institution as assurance that it will be paid. If a person defaults or cannot pay off the loan, the collateral is becomes the bank or financial institution’s property.

If your friend is deemed credit worthy by the bank or financial institution she is approaching for a loan, and if she has ample collateral, she will be granted a loan in no time. There would be no need for a guarantor. However, if the bank or financial institution feels that additional assurance is needed that the creditor (person applying for the loan) can pay, it may require a guarantor to sign the loan document.

What is a guarantor?

As the name implies, a guarantor guarantees to or assures the bank or financial institution that a person’s loan will be paid. He in effect tells the bank or financial institution that he will pay the loan if for some reason the creditor will not be able to pay it in full plus interest. A guarantor can guarantee any type of loan, from a housing loan to even credit card debt.

Be very careful about signing as guarantor in any type of loan. Some people do not realize how serious a matter it is until they find themselves in unfavorable circumstances.

There have been cases of debtors defaulting on their loans and disappearing, even going as far as fleeing to other countries so banks and financial institutions cannot go after them. Guarantors are then looked up and held accountable for the payments already due. It can be quite a shock to be asked, even compelled, to pay for a loan you did not apply for, as some of these guarantors have experienced. And should you be unable to pay off the loan, you may be faced with a court case and your credit history will be severely affected.

Your situation is delicate, considering that it’s your close friend who is asking you the favor of co-signing as guarantor for a loan. But do not decide on the basis of friendship and emotions alone. Ask yourself if you are willing and are able to assume paying your friend’s loan in the event she defaults on paying it.

Should you decide to go ahead and sign on as guarantor, start saving more than you normally do and invest this wisely, just in case the inevitable happens in the future. Make sure you maintain ties with your friend for the duration of the paying period.

If you decide to decline your friend’s request, this does not mean the end of a friendship. There are some other things she can do, such as lowering the loan amount, securing other collateral, and maybe even asking family members to share ownership of the property she plans to buy. Or she may even consider postponing purchasing the property at this time and just continue saving on her own until she has built up enough funds. Your friend may also want to look at a more affordable property. Yet another thing she can do is to check out government financial institutions such Pag-Ibig Fund, SSS or GSIS to see if she will be able to qualify for a higher loan amount at a lower interest cost.

It is important for anyone applying for a loan to determine if he or she will be able to afford the regular payments for the number of years specified. If your friend is not confident she can do this, by all means, she should forego applying for the loan at this time.