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Co-signing or guaranteeing a loan is one of the most dangerous financial decisions you can commit to. When you co-sign or guarantee someone’s loan, you take on all the financial risk, yet receive little or no benefit from the transaction. But in most cases, the guarantee is provided for a loan that a relative or friend has applied for, making it a difficult request to decline.
The reason a borrower requires a guarantor on the loan is because the lender has determined that the borrower is a bad credit risk and they wish to transfer most of the risk of the loan to the guarantor.
As the guarantor you take on all the risk, but have no benefit from the transaction. While the borrower receives the funds from the loan or use of the asset (i.e. vehicle) the loan is for, if the borrower defaults, it is the guarantor who will have to pay the balance of the loan. In other words, if the borrower defaults, then guarantor pays for a loan they received no benefit from.
It’s important to note, there is a small difference between co-signing a loan and guaranteeing a loan.
When you co-sign a loan and there is a default in the loan, the lender can demand payment from either the borrower or the co-signer. In fact, the lender can exclusively pursue the co-signer and not the original lender. If you guarantee a loan, the lender must make an effort to collect the outstanding loan from the principal borrower first before they call on the guarantor.
There a three types of guaranteeing a loan:
In some cases, a person may co-sign for a debt without even realizing it. One common situation is when one person offers another a supplementary credit card. In most cases, the card holder agreement, which you agree to once you use a credit card, will state that all primary and secondary card holders are responsible for the full amount due on the credit card account.
If you decide to co-sign or guarantee a loan consider the following:
Co-signing or guaranteeing a loan may be a feel good decision, but it is a financially risky decision and something one should carefully consider before doing.
If you have guaranteed or co-signed a loan and find yourself struggling to pay off someone else’s debt, there are debt solutions available to help you regain control of your finances. Speak with your local MNP advisor for a free, no-obligation consultation. Once you have reviewed all of your options, you can choose the route that best meets your personal financial needs.
Joel Kideckel is a Licensed Insolvency Trustee within our Markham location. To learn more about how MNP Debt can help you, contact any of our local office at 416.515.3921
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