What you should know before cosigning a loan

We'll explain what it means to be a guarantor and what you are committing to when you offer your guarantee.

A cosigner is the person or company that offer a guarantee of payment in the event that the main borrower of a loan cannot repay their debts. A guarantor is therefore one of the most common figures involved when a bank loans large amounts of money to an individual or business.

When granting a mortgage loan for a significant amount of money, the institution offering the financing wants every possible guarantee that it will be able to recover its money, along with the interest agreed upon in advance. Therefore, when granting a mortgage, the person acting as cosigner for the applicant must prove the same economic and financial solvency as the borrower, and will be bound to repaying the money borrowed.

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What are you committing to as a guarantor

As cosigner, in the event of default by the borrower, you will respond with all present and future assets until the outstanding amount is settled. However, before this situation occurs there is first a required process to demonstrate that the loan borrower lacks the ability to pay, whether by using his or her own salary or income or by forfeiting other assets. At this point the guarantor must take over payment of the monthly installments for the loan, along with any penalty interest that may have been generated by the borrower's delays.

The cosigner will therefore be liable for the same payment obligations and legal repercussions in the event of default, and they may be subject to seizure of salary or even real estate property. However, it is worth clarifying that this is an extreme result that occurs very infrequently.

In addition, there are different ways to cosign a loan and some of them only entail partial liability for payment; this means that in a case where the guarantor becomes liable for repayment, the amount of money owed will be limited, rather than being the full amount of the debt.

On the other hand, side from the payment responsibility, the cosigner should be aware that, even though the debt is not theirs, it will appear in their name in the Bank of Spain Risk Information Center (CIRBE). This is a database that records the various loans, credit facilities, and guarantees that credit institutions maintain with their customers. It is important not confuse the CIRBE with the default lists, which are something completely different. Appearing in this database as a guarantor will reduce your own ability to obtain loans or credit, since it is known that you already have a potential liability to confront in relation to payment of another debt.

Who you can cosign a loan

In short, to cosign any bank loan, you must have the same payment capacity as the borrower. This comes with a series of requirements, namely:

  • Have a stable income in a sufficient amount: this may be a salary, a pension, or any other source of income, and the guarantor must demonstrate the capacity to handle the monthly installment payments for the loan in case this becomes necessary.
  • Little or no outstanding debt: in order for the bank to accept a guarantor being proposed by the borrower, the guarantor should not have any outstanding debt in the form of his or her own loans or mortgages.
  • Sufficient equity and assets: One of the most common requirements for acting as a guarantor is possession of unencumbered real estate assets, or in other words, properties that are fully paid off. This offers an additional guarantee, because if all else fails the guarantor will be able to use his or her own assets to repay the debt.
  • Finally, and for obvious reasons, a guarantor must be an adult.
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Finally, we should add that agreeing to cosign a loan is a major undertaking that will tie the guarantor, borrower and bank for the entire duration of the loan, with all the repercussions that we have set out. This means that the guarantor must also be very clear on the terms and conditions of the loan and whether or not he or she is prepared to take these on if it becomes necessary.
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