Guaranteeing a loan for a loved one: Yes or no?
Your daughter has asked you to guarantee a loan that she wishes to get. What will be the consequences if you accept?
Generosity and its downsides
When you guarantee a debt, you carry out the purest act of generosity: you are giving without receiving anything in return.
Unfortunately, not many people realize that the story does not end there. You need to know that guaranteeing a loan reduces your own borrowing capacity. In fact, the financial institution will add the guaranteed loan to your list of debts, even if your daughter regularly makes her payments. You would thereby be penalized, because your financial wiggle room would be smaller and this debt would appear in your credit report.
And if the debtor doesn’t pay?
Remember that the non-payment of a debt is often caused by a lack of ability rather than a lack of good will… As in most cases, it would therefore not be because your child doesn’t want to pay, but rather because she won’t be able to.
Accordingly, if your daughter asks you to guarantee her loan, don’t only evaluate her good faith, but also consider her employment stability and all other factors that are likely to create financial difficulties (ex. a separation, maternity leave, a move, loss of employment or decrease in work hours, etc.). These are events that will negatively influence her finances and could affect her ability to repay.
Tell yourself that if the financial institution requires a guarantor, it is because they have doubts about your child’s reimbursement capabilities. If the financial institution, an objective expert in the filed, has doubts, maybe you should too…
Finally – and this is imperative – ask yourself the following question: what would the impact be on my own finances in the case of defaulted payments on the guaranteed loan? If you can absorb the reimbursement costs of the loan in that situation, the decision to guarantee the loan would be justified. If, on the other hand, you risk experiencing financial difficulties yourself, you should take this into account before accepting.
In any case, an honest discussion with your daughter is necessary to avoid making a decision in the heat of the moment. Too often, we have seen a parent caught up in the financial turmoil of the child they endorsed. In these sad cases, all parties find themselves at a financial impasse, despite the will of the child and… the parent.
Are you faced with this situation? Be cautious and swap your parent/friend hat for that of a banker before signing on the dotted line.