Sponsored post: The following article is one of the few paid advertisements that I choose to post because I care about the subject. Saying “no” when friends or family ask for money might be the smartest thing you do. Remember: The single most important benefactor for living a happy life is having good relationships. Don’t screw them over money.  

If You’re Asked to be a Guarantor, Look Before You Leap

If you have a loved one having money troubles who asks you to be a guarantor on a loan, you need to know exactly what you’re getting yourself into before you agree. You should be fully aware of the liabilities you are assuming by signing your name to such a loan. Consumers entering into such transactions may not have all of the protections guaranteed with other types of loans, and while the authorities are working to increase these protections, they’re not quite there yet. If you are not careful you could end up with money troubles of your own.

There’s nothing intrinsically troublesome about a guarantor loan, which is generally longer term and at somewhat lower interest rates than a payday loan. It can be good for larger purchases, and can certainly be a reasonable option for people whose credit history disqualifies them from obtaining a conventional loan. A guarantor loan is very similar to a personal loan but requires the borrower to find someone with a good credit history to agree to pay back the loan if the borrower is unable to do so.

A guarantor loan can work out quite well – it can also be a step toward establishing or re-establishing credit, as long as both borrower and guarantor understand exactly what they are taking on and live up to the terms of the loan.

Mountains of debt and uncertain protections

In 2015 the financial media were full of reports about problems with guarantor loans – problems that were emerging in the wake of regulatory crackdowns on the payday loan industry, which specializes in small short-term, high-interest loans for people with poor credit. Many people who could no longer qualify for a payday loan were turning to guarantor loans instead.

Know when to say “No”

If you’re fully aware of the risks of being a guarantor and you’re not willing or able to assume that risk, you absolutely must stand up for yourself. It’s marginally easier to do so if you simply don’t have the money and know you could not afford to pay the loan back if your loved one were to default. But it can be considerably more difficult if you do have the money but don’t trust that the person will be able to hold up his or her end of the bargain.

There are lots of guidelines out there for people who have trouble saying no. This is likely due to the fact that from an early age, we learned to associate the word “no” with being either scolded or being denied something we wanted. Growing up, many of us have difficulty breaking that association and remembering that the word “no” was often uttered in an effort to protect us from harm or teach us how to set boundaries for our own well-being. It is this remembered association that must be acknowledged (and cleaned of the guilt that often follows) if we are asked to do a favor that we fear might hurt us financially.

If you do have to say “no” to someone you care about, make it understood that you are not rejecting or abandoning them. Help them find alternatives to a guarantor loan, or guide them towards a debt charity or qualified counselor if they’re in serious financial trouble. Though it may seem like “tough love,” saying no is sometimes the kindest thing. you can do, not only for the person in need but also for your own finances and peace of mind


Dividend Portfolio · July 23, 2017 at 9:55 am

I generally agree with the points raised in this article. Thankfully, today I have good credit. That wasn’t always the case. But, if a friend or family wanted me to co-sign on a loan, or be the guarantor, I would likely say no. If memory calls, I have already said no in the past. I’m so protective of my good credit score that I would almost want to be in charge of making the payments, and have friend or family pay me because I don’t want to have any missed payments on my credit file. So, unless I’m willing to, essentially, take on the responsibilities of a new loan, I would definitely say no.

Let’s say that the loan is only for 3 years. That’s a relatively short time, especially compared to a mortgage where you can get a 30 year loan. Well, things might be great today, but a lot can happen in 3 years. Also, god forbid, if you’re friend or family member dies, then you are on the hook for the loan. And no one knows when they are going to die. So, there’s lots of risk associated with being a guarantor, which is why so many financial advisers recommend against it. Only if you understand and are willing and able to take on all the risks should you be the guarantor of a loan, IMHO.

    Stockles · July 23, 2017 at 2:06 pm

    Hi Dividend Portfolio,

    So true. However, the reason for so incredible high housing prices is that parents stands as a guarantor for young adults, and therefor drive up prices. It´s almost impossible for young adults to buy an apartment without this guarantinst, so it´s because very normal. Almost norm. I think it´s scary.

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