You may have heard the term, guarantor, which means, a person who is willing to give a guarantee or take responsibility in case of failure or non-completion of a task. And, in the credit market, the term guarantor means, the person who will cover the risks of non-payment of the loan if the primary borrower is unable to do so.
Certainly, it is a big responsibility and carries significant risk to the person who is becoming a guarantor. In general, the person who becomes a guarantor enters into the agreement only in good faith and trust that the borrower will pay back the loan on time.
But, the chances of default by the borrower remains, and in that case, the guarantor has to fill the shoes of the borrower by repaying the loan. The situation, no guarantor wants to get in as it can cause a strain in the relationship, which is quite uncomfortable to deal with.
Therefore, before becoming a guarantor for personal loan, whether it is for friends or siblings, you need to consider the following points.
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Points to Consider Before Becoming a Guarantor for Personal Loan
- Consider the creditworthiness of the borrower: Even if the borrower is someone close to you, you need to check his/her creditworthiness and capacity to repay the loan on time. Only if you are satisfied, you should go ahead.
- Examine the cause, why the borrower needs a guarantor: A personal loan is an unsecured loan, which doesn’t require collateral or a guarantor. Therefore, you should understand why the lender is looking for a guarantor. If it's due to a poor credit score or a high debt-to-income ratio, you should reconsider the offer to become a guarantor.
- Develop a Contingency Plan: Even if you are satisfied with the borrower’s ability to repay the loan on time, you should have a contingency plan, as in case of non-payment, the entire burden is on you.
Prepare a plan, how you will repay the loan in case of default. Using the personal loan EMI calculator, you can analyse various situations and conditions and develop a plan accordingly.
- Check the loan amount: Before becoming a guarantor, check the amount that is being borrowed from the lender. If the loan amount is higher than your level of financial comfort, you should not go ahead, and refrain from becoming a guarantor.
- Impact on your creditworthiness: You should analyse how your creditworthiness is going to get affected. Because, if you require a loan during the loan tenure, your status as a guarantor in the credit report might impact your ability to get a loan or affect the process.
And, in case of default, your credit score is at risk because you need to make monthly EMI payments on time on behalf of the borrower.
Safeguards for Becoming a Personal Loan Guarantor
If you have decided to become a guarantor for a personal loan to help out your friend or sibling, it’s a good step, but at the same time, you need to be a bit cautious. The following are the few tips you can consider before becoming a guarantor:
- Read the loan documents carefully: Before signing on the loan documents, read all the terms of the loan and repayment sequence. Go through the personal loan documentation, before saying yes.
The idea is not to follow the words of your friend/sibling (primary borrower) blindly but to make an informed decision by discussing all the clauses with the lender and the obligation you will be taking as a guarantor.
- Keep track of EMI repayments done by the borrower: You should keep track of the borrower on repayments, whether he/she is making timely repayments or is financially sound to meet all the future loan obligations efficiently.
- Ask for a co-guarantor: If possible, request for a co-guarantor to the borrower, as it will reduce your risk of exposure to financial loss in the case of default by the borrower. It also provides a degree of financial safety.
- Only become a guarantor of the person, whom you can trust: Apart from all the safety checks, it’s the trust based on which you should decide to become a guarantor of someone. Never go into business, whom you cannot trust or can take undue advantage of you.
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It’s not a bad idea to become a guarantor for your friend or sibling as it shows your humane side to your loved ones that you really care for them. And, if there is a default by the borrower, don’t panic and take steps to first clear off the debt.
You can consider taking a personal loan online at a lower interest rate and longer repayment tenure and prepay the loan you have taken the responsibility for as a guarantor. It will help you lower the overall financial burden and reduce the risk of a credit score downgrade.