A personal loan is usually taken at times of financial need or to meet large and important expenses. It is easy to obtain and convenient to use but a personal loan involves a repayment guarantee. In case an applicant doesn’t meet all the eligibility criteria like a credit score above 750, or if the borrower is involved in a high-risk job, is close to retirement, doesn’t have a salary or has a poor history of loan repayments, then financial Institutions and banks may require the borrower to bring a loan guarantor before disbursing the loan.
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Who is a loan guarantor?
A personal loan guarantor is a person who will sign a loan agreement with the borrower and stand as a guarantor for the repayment of the loan. This person may be a family member, close friend or a trusted colleague. By accepting to become a guarantor, a person is accepting that if the primary borrower defaults or is unable to repay the loan, then he/she will be responsible for the repayment of the loan. Therefore, it is important to know all the risks and clauses of the agreement beforehand.
Check the type of guarantor you are signing off as
Lenders ask for two types of guarantors -- non-financial guarantors and financial guarantors. Non-financial guarantors serve as the character certifier to whom the lender reaches out to in case they’re unable to contact the primary loan borrower. A financial guarantor on the other hand, must submit financial documents in account (i.e. collateral) and agree to be responsible for the repayment of the loan if the primary borrower is unable to pay.
Consider creditworthiness
You must know the borrower and be 100 percent sure of his/her credibility before signing up as a financial guarantor. Also, find out the reason why the borrower needs a guarantor to understand his/her credit history.
Your personal assets may be at risk
As mentioned above, if the primary borrower defaults on payment, the loan is practically transferred to the guarantor, who will then need to repay the loan. So, even if you did not borrow any money, you may end up being held liable for repaying the loan amount and lose personal assets if the primary borrower defaults.
It can affect your credit scores and loan eligibility
In case a primary borrower defaults on repayments, then not only does the onus of repaying the loan fall the personal loan guarantor, but it also affects his/her credit scores and finances. The guarantor’s eligibility to take out loans in the future maybe considerably reduced and he/she may not get a loan for the desired amount.
Individuals are advised to check all the clauses and get a co-guarantor if possible to reduce exposure. Also, guarantors need to keep record of payments and help assure timeliness of repayments.
(Edited by : Sudarsanan Mani)
First Published: Apr 28, 2022 5:31 PM IST
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