What you should know before cosigning a loan

We’ll explain what it means to be a guarantor and what you are committing to when you offer your guarantee.

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A guarantor is a person or entity that offers to guarantee repayment of a loan if the borrower becomes unable to pay off the debt. A guarantor is, therefore, one of the most common figures involved when a bank loans large amounts of money to an individual or business.

When granting a mortgage loan for a significant amount of money, the institution offering the financing wants every possible guarantee that it will be able to recover its money, along with the interest agreed upon in advance. This means that when a mortgage is granted, the person acting as guarantor for the borrower must demonstrate the same economic and material solvency as the party that will receive the money, and will also be taking on an obligation to repay it.

What are you committing to as a guarantor

What are you committing to as a guarantor

As a guarantor, if the loan’s borrower fails to make the agreed-upon payments, all of your own present and future assets can be used as a way to pay back the outstanding debt. However, before this situation occurs there is first a required process to demonstrate that the loan borrower lacks the ability to pay, whether by using his or her own salary or income or by forfeiting other assets. At this point, the guarantor must take over payment of the monthly installments for the loan, along with any penalty interest that may have been generated by the borrower’s delays.

This also means that in the event of non-payment, the same payment obligations and legal consequences will fall upon the guarantor, and it is even possible that the guarantor’s own income or assets could be confiscated and used as a form of repayment. However, it is worth clarifying that this is an extreme result that occurs very infrequently.

Furthermore, there are different ways to guarantee a loan, some of which only make the guarantor responsible for partial repayment; this means that in a case where the guarantor becomes liable for repayment, the amount of money owed will be limited, rather than being the full amount of the debt.

In addition to the liability for repayment, the guarantor must remember that even though he or she is not the original borrower, the loan information entered into the Banco de España’s Risk Information Center (CIRBE) will include the name of the guarantor. This is a database that records the various loans, credit facilities, and guarantees that credit institutions maintain with their customers. It is important not to confuse the CIRBE with the default lists, which are something completely different. Appearing in this database as a guarantor will reduce your own ability to obtain loans or credit since it is known that you already have a potential liability to confront in relation to the payment of another debt.

Who can be a guarantor

Who can be a guarantor

In brief, any guarantor for a bank loan will be required to have the same repayment capacity as person borrowing the money. This brings with it a series of requirements that we will review here:

  • Have a stable income in a sufficient amount: this may be a salary, a pension, or any other source of income, and the guarantor must demonstrate the capacity to handle the monthly installment payments for the loan in case this becomes necessary.
  • Little or no outstanding debt: in order for the bank to accept a guarantor being proposed by the borrower, the guarantor should not have any outstanding debt in the form of his or her own loans or mortgages.
  • Sufficient equity and assets: One of the most common requirements for acting as a guarantor is possession of unencumbered real estate assets, or in other words, properties that are fully paid off. This offers an additional guarantee because if all else fails the guarantor will be able to use his or her own assets to repay the debt.
  • Finally, and for obvious reasons, a guarantor must be an adult.

As a final point, it is worth emphasizing that being accepted as a guarantor for any loan is a very important step that will link together the guarantor, the borrower, and the bank for years over the entire life of the loan, with all of the potential repercussions that have been described here. This means that the guarantor must also be very clear on the terms and conditions of the loan and whether or not he or she is prepared to take these on if it becomes necessary.