Who Can Become a Guarantor For a Loan?

In credit transactions, surety is quite common. The bank may require you to find someone who will vouch for you when issuing a loan. Or your best friend or close relative may ask you to vouch for him under a loan agreement. It is not always convenient to refuse such a request. But before giving your consent, it is better to know the consequences of your decision. Who is a guarantor, and what responsibilities and risks does he bear, we will tell you in more detail.

What is a surety?

A surety is an obligation to repay a loan debt if the borrower fails to repay it. A surety is a person to whom the bank will make demands to fulfill obligations under the loan agreement if the borrower is unable to fulfill them for any reason.

Guarantors should not be confused with co-borrowers. A co-borrower is the same participant in the loan agreement as the main borrower (called the “title borrower”). A co-borrower is usually involved in the transaction when applying for a mortgage or a large loan. He receives the same rights and obligations under the loan agreement as the title borrower. Therefore, credit and financial institutions willingly include their earnings in the calculation of total income. Accordingly, the borrower can receive a larger amount of money as a loan.

A common example: spouses are taking out a mortgage. The husband is the title borrower in the transaction, and the wife is a co-borrower. The entire family is credited. If the husband does not have enough income to receive the requested amount, the wife’s income is included in the solvency calculation.

Why involve guarantors?

In banking practice, a guarantee is required when issuing large loans. The bank may require additional security if it doubts the borrower’s ability to repay the borrowed funds on time.

A surety is an additional type of security for a loan. Therefore, having such a guarantor, you can sometimes get a loan on more favorable terms:

• at a lower interest rate;
• for a large amount;
• for a longer period.

Also, having guarantors can reduce the risk of loan denial. For example, the applicant has a bad credit history and no liquid assets that can be taken as collateral. Without additional collateral, he is unlikely to be granted a loan because the risks are too high. A solvent guarantor with a good credit history will increase the chances of approval of the loan application.

Why become a guarantor yourself? Most often, it is not a question of personal gain, but of family or friendly ties. But you can vouch for someone on a paid basis. A surety is the same service as any other. The law does not prohibit receiving remuneration for it. But when agreeing to this, you must remember the consequences. Especially the amount of debt that will have to be repaid if the debtor does not return the money on time.

It makes sense to vouch for another person when the borrower and guarantor pursue common business goals – they use borrowed funds to develop a business, buy common property, and invest in real estate. They are both interested in receiving a loan and equally use the loan money.

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Who can be a guarantor?

Any adult, capable citizen can become a guarantor. He or she does not necessarily have to be a relative of the debtor. This could be a colleague, acquaintance, friend, or business partner. The main thing is to have a steady income sufficient to repay the debt and a good credit history. If there is a delay in their loans, the bank will not accept their guarantee – this will be regarded as a high-risk transaction.

To ensure that the candidate you find is capable of acting as a guarantor, check that he or she meets the following criteria:

• Age. Each bank has its age requirements, usually from 18 or 21 years old to 65-75 years old.
• Citizenship of the Amerian Federation. Only a small number of credit and financial institutions are ready to consider foreign citizens, but only if they have a permanent residence permit in the American Federation.
• Official permanent income is sufficient to cover the debtor’s credit obligations.

A clean credit history, outstanding convictions, and the presence of debt on writs of execution are optional criteria. Their assessment depends on the internal policy of the creditor and its approaches to credit risks.

Registration of surety

After the bank approves the guarantor’s candidacy, a surety agreement is concluded with him in simple written form. It does not require notarization.

The contract specifies:

• an obligation for which a surety is issued;
• amount of liability – when securing credit transactions, the guarantor is usually liable to the same extent as the borrower;
• the periods within which the guarantor is obliged to fulfill the demands made on him;
• consequences of failure to fulfill obligations to the creditor.

The package of documents is similar to what is required when drawing up a loan agreement: passport, salary certificate, copy of work record book, and other documents depending on the requirements of a particular bank.

What is the guarantor responsible for?

By law, the guarantor is the same debtor as the borrower. He bears joint and several liabilities with the debtor for the secured obligation. This means that he is responsible for all debts of the borrower, including:

• principal debt;
• interest;
• penalties for violating the terms of a credit obligation – increased interest rates, late fees, and fines for failure to comply with the terms of the agreement.

The obligation to pay off the overdue debt arises for the guarantor immediately after the borrower has violated his obligations and the creditor has presented him with his demands. Specific figures and terms are specified in the surety agreement.

The creditor may make demands on both the borrower and the guarantor at the same time. This means that, for example, when collecting a debt through the court, he does not have to try to collect the debt from the borrower first. He can make demands on both the debtor and the person who guarantees for him.

Being presented with a debt for repayment is not the only risk of guaranteeing. By guaranteeing for someone else, you reduce your solvency and put your credit history at risk.

When calculating solvency, credit and financial institutions take into account all financial obligations of applicants. These are both their loans and those for the return of which the applicant has guaranteed. Therefore, if the volume of total obligations is too large, you may be reduced in the amount of the loan or refuse to issue it at all.

And of course, any delay will negatively affect your credit history, which now depends not only on you but also on third parties. Are you confident in their discipline, integrity, and financial solvency? It is better to get answers to these questions before signing the contract.

What are the consequences of evading obligations?

Refusal to satisfy the creditor’s demands is fraught with negative consequences:

• He may impose penalties as provided for in the contract.
• It is possible to collect the debt through legal means, which will increase the amount of the debt by the amount of legal costs and other expenses of the creditor to collect the debt. As part of the forced collection procedure, the bailiff can seize property, block bank cards, prohibit travel abroad, limit the right to dispose of funds and appoint a deduction from wages until the debt is fully repaid.
• Deterioration of your credit history and possible problems with obtaining your credit in the future.

It is impossible to unilaterally refuse to perform the contract. The only way is to agree with the creditor on termination by mutual agreement. But this requires the consent of the other party. The bank is unlikely to agree to terminate the contract, which serves as security for the credit transaction without providing other guarantees. One solution to the problem is to find a new guarantor.

But there is a chance to get back the funds paid. If you have paid off the debt for the borrower, then in this part you become his new creditor. This means that you have the right to demand full compensation for your expenses, including through legal proceedings.

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What to do if claims are made

The simplest advice: pay off your debts as soon as possible. But, unfortunately, it does not always work.

What to do if there is no possibility to pay off the creditor immediately:

1. First of all, contact the debtor, find out the reasons for the delay, and try to convince him to pay off the debt. If he has temporary financial difficulties, you can agree to pay off his monthly payments during this time, so that there are no delays and penalties. And when the situation improves, he will return the money to you. But do not forget to formalize this with a loan agreement in writing. Otherwise, it will be problematic to prove that you paid the money for him.

2. If the debtor has serious financial difficulties, it is better to contact the bank directly, explain the situation, and ask for a deferment. Credit holidays are a good option for resolving temporary problems, without involving bailiffs and without large fines.

The last resort is to file for bankruptcy after the debt collection procedure has begun. But for the court to declare you bankrupt, you must not have a source of income or property that can be seized. When assessing the acceptability of this method of getting rid of debts, you should also remember the consequences of bankruptcy. 

The procedure itself can take several months, and sometimes years. All this time, your money will be managed by a financial manager. You will need to agree on all expenses with him and get permission to spend a certain amount per month on your current needs. You may be prohibited from traveling abroad. Declaring bankruptcy spoils your credit history, which may prevent you from getting a loan in the future. And if the loan application is approved, it will be on worse terms – with a higher rate, for a short term, or with a requirement for additional collateral. For three years, a bankrupt person cannot run a business, and an individual entrepreneur cannot register with the tax office for five years.