Should I guaranty my relative’s loan?

Guaranty a relative's loan

Guaranty a Loan

Your relative wants to borrow money and has asked you to guaranty repayment. Should you do it?

Why does the Bank want a guarantor?

Banks often require a third person to sign a guaranty when the borrower has bad credit or few assets. The bank wants someone with good credit and assets to assure repayment if the borrower defaults.

If you are considering signing a guaranty, you should be confident that you can repay the loan if necessary without suffering financial problems.

Many people sign guaranties thinking that they only have secondary liability behind the borrower. The fact is, however, that almost all guaranties state that the bank can come after you first if it chooses.

Can you help your relatives and still limit your exposure?

The answer is yes, and there are several ways to do this. We will look at these using an example of your relative borrowing $20,000 from the bank.

First, you should ask the bank if it will accept a limited guaranty. For example, ask the bank if it will limit your exposure to only $10,000 instead of the entire $20,000.

Second, you can ask the bank to put a time limit on your obligation. If your relative is going to repay the $20,000 over the next four years, the agreement can state that it expires after two years.

Third, the bank may allow each payment made by your relative to reduce the amount of your guaranty. So, after your relative repays $1000, your guaranty would then be $9000, and so on.

Finally, you should obtain a written agreement from your relative stating that he/she will repay you if you have to pay to the bank.

Will the bank negotiate over the terms of a guaranty?

Most banks use pre-printed forms. Even so, the bank wants to make a loan, and loan officers are usually open to negotiation on the loan terms. In any event, you should not simply sign the pre-printed form without talking to the loan officer about limiting your liability.

Click here for more information on co-signing loans, which is similar to a guaranty.

If you are considering signing a guaranty of a loan, call the Panter Law Firm at 601-607-3156 for a consultation.