What Are the Dangers of Being Someone's Guarantor?

Becoming a guarantor for someone else's loan can turn his life around financially, but also carries major financial risks. If the borrower defaults, the guarantor remains liable for any outstanding payments. Should something go wrong, the guarantor's credit rating is damaged, and his own finances seriously jeopardized. Lenders can move to seize bank accounts, property or other assets to secure payment on the remaining balance. For these reasons, any decision must be based on knowledge of the borrower's repayment ability.

Basic Definition

In simple terms, a guarantor is someone who takes full responsibility for paying someone else's debt, according to The Legal Resource Center of Alberta, Canada. This step requires signing a legally binding agreement, or guarantee, to that effect. According to the center, banks typically require this step when they feel that the loan is not a good risk. Lenders commonly cite these issues when the borrower is too young to establish credit, or has defaulted on loans in the past.

Credit Cards

Following Congress's passage of the CARD Act, parents may be called on as guarantors for their college aged children's credit cards, according to the Bank of America's website. Guarantors must be at least 21, and may suffer damaged credit scores resulting from any missed payments. The guarantor can ask to be removed from the account, but the bank requires a credit check for the remaining party. If the remaining party does not qualify, the account will be closed, with the full balance due.

Mortgage Issues

Mortgages are one of the most common reasons for guarantor agreements, especially for young people who cannot afford the large deposits that ensure a better deal. However, signing such agreements often increases the costs to parents --- because the lender often demands an additional percentage, on top of the one being legally guaranteed. Guarantor agreements also do not wipe out the need for a deposit, whose expenses will rapidly shoot up if the interest rate is high.

Personal Loans

Fraud is one of the biggest risks of a guarantor agreement if the borrower defaults without any intention of paying, according to "Business Daily Africa." The bank, in turn, can attempt to seize cash and property to satisfy the final balance. The guarantor's creditworthiness will be damaged, at least in the short run, and he may lose his home, if that was used to back up the loan. Many agreements also contain an acceleration clause, enabling the lender to demand full payment of the remaining amount at once.