07/26/2007

Helping Others Get Loans

Have you ever had a family member, close friend, or business associate ask you to sign paper work for them to get a loan? If so, did you help them without knowing the consequences to you should they default on their loan? Let’s discuss some options you have when asked to help someone else borrow money and what your obligations and consequences are should they end up defaulting on their loan.

When you co-sign a loan with another party, you are a co-maker on the note. This means that you have full liability and obligation to pay and you put your credit rating at risk for them. If your relative/friend defaults, the creditor can sue you for payment as well as the borrower.

When you guarantee a loan for another party, you have not signed the loan as a co-maker, but you have signed to guarantee the creditor that you will pay the loan in case the borrower defaults. In many cases, creditors will demand payment from the guarantor so that the loan will be paid in full. You will need the cash to payoff the loan, or possibly request the creditor to make a direct loan to you for the payoff amount. The guarantor of a loan is subject to the same credit underwriting scrutiny from the creditor as the original borrower. However, guarantors do not always have the guaranteed debt show up on their credit report because it is an indirect debt to the guarantor. In other words, as guarantor, you are not directly responsible for payment, but are expected to payoff the debt in case of default.

The least risky way to help someone get a loan is to pledge collateral for them. The creditor will normally state what type of collateral is needed and you can help your relative/friend by signing a third party pledge agreement. This means that you are not obligated to pay the loan at all, but you are agreeing to forfeit whatever collateral you pledged so the creditor can liquidate it to pay the loan off if the borrower defaults.

Always consult your trusted banker for advice when asked to help another person borrow money. Because it can adversely affect your credit rating and your own ability to borrow in the future, be very careful in committing to help someone else borrow money.

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07/26/2007

Helping Others Get Loans

Have you ever had a family member, close friend, or business associate ask you to sign paper work for them to get a loan? If so, did you help them without knowing the consequences to you should they default on their loan? Let’s discuss some options you have when asked to help someone else borrow money and what your obligations and consequences are should they end up defaulting on their loan.

When you co-sign a loan with another party, you are a co-maker on the note. This means that you have full liability and obligation to pay and you put your credit rating at risk for them. If your relative/friend defaults, the creditor can sue you for payment as well as the borrower.

When you guarantee a loan for another party, you have not signed the loan as a co-maker, but you have signed to guarantee the creditor that you will pay the loan in case the borrower defaults. In many cases, creditors will demand payment from the guarantor so that the loan will be paid in full. You will need the cash to payoff the loan, or possibly request the creditor to make a direct loan to you for the payoff amount. The guarantor of a loan is subject to the same credit underwriting scrutiny from the creditor as the original borrower. However, guarantors do not always have the guaranteed debt show up on their credit report because it is an indirect debt to the guarantor. In other words, as guarantor, you are not directly responsible for payment, but are expected to payoff the debt in case of default.

The least risky way to help someone get a loan is to pledge collateral for them. The creditor will normally state what type of collateral is needed and you can help your relative/friend by signing a third party pledge agreement. This means that you are not obligated to pay the loan at all, but you are agreeing to forfeit whatever collateral you pledged so the creditor can liquidate it to pay the loan off if the borrower defaults.

Always consult your trusted banker for advice when asked to help another person borrow money. Because it can adversely affect your credit rating and your own ability to borrow in the future, be very careful in committing to help someone else borrow money.

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