Often through life a friend or indeed a family member will approach you or you will feel the inclination to guarantee a loan for someone close. Unless this person is a family member you trust implicitly, Im going to recommend that you think extremely carefully on this one and heres why. What would you think if a friend or relative asks you to guarantee a loan? Your first reaction will most often be an inclination to help them by agreeing to guarantee the loan but I recommend that you ensure that you understand what it involves thoroughly.

It is imperative to come to grips with the fact that you are being asked to guarantee a loan. You are trusting someone else to make payments every time throughout the schedule on time. If the borrower does not pay the debt, you will be forced to. Be sure you can afford to pay if you have to, and that you want to accept this responsibility. If you dont pay the debt you will have a default against your name even though it was someone elses loan initially.

Its possible you may have to pay up to the full amount of the debt if the borrower does not pay. Also, you may have to pay late fees or collection costs, which increase this amount.

The creditor can use the same collection methods against you that can be used against the borrower, such as suing you, garnishing your wages, etc. If this debt is ever in default, that fact will become a part of your credit record.

Studies of certain types of lenders show that for guaranteed loans that go into default, as many as three out of four guarantors are asked to repay the loan. Thats a terrible statistic to realize.

If you guarantee a loan and your friend or relative misses a payment, the lender can immediately collect from you without first pursuing the borrower. In addition, the amount you owe may be increased - late charges - if the lender decides to sue to collect. If the lender wins the case, your wages and property may be taken. When money is owed most lenders are merciless.

Despite the risks, there may be times when you want to guarantee a loan. Your child may need a car or student loan, or a close friend may need help. Before you guarantee a loan, consider this information:

Be sure you can afford to pay the loan. If youre asked to pay and cant, you could be sued and your credit rating could be ruined for an extensive period.

Even if youre not asked to repay the debt, your liability for the loan may keep you from getting other credit because creditors will consider the guaranteed loan as one of your liabilities.

Before you pledge property to secure the loan, such as your car or house, make sure you understand the consequences. If the borrower defaults, you could lose these items or be forced to sell them.

Important: Ask the lender to agree, in writing, to notify you if the borrower misses a payment. That will give you time to deal with the problem or make back payments without having to repay the entire amount immediately. Ensure you get copies of all important papers, such as the loan contract. The lender is not required to give you these papers; you may have to get copies from the borrower.