Things To Know Before Becoming a Personal Loan Guarantor

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Jan 27, 2021Personal Loan

A person generally takes a personal loan at times of financial need or to meet some large and important expenses. A personal loan is easy to obtain and convenient to use but involves giving a repayment guarantee. Sometimes, if an applicant doesn’t meet all the criteria like a credit score above 750, financial Institutions while disbursing the loan may ask to get a Personal Loan Guarantor.

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Who is a Personal Loan Guarantor?

A Personal Loan Guarantor is a person who will sign your loan agreement with you and stand as a guarantor of your repayment of the loan. This person may be a family member, close friend or well-trusted colleague. It's quite a big responsibility to be a personal loan guarantor as by accepting this role you are accepting that if the primary borrower defaults or is unable to repay the loan, then you will repay it in such a case.

If you have been asked to be a Personal Loan Guarantor – then there are some things you should know before you agree. 

The Responsibilities and Impact of Becoming a Personal Loan Guarantor

The Personal Loan guarantor is the person who acknowledges that if the borrower defaults then he will pay his debt. There are other effects as well of signing on as a personal Loan guarantor. If the loan is being repaid on time and in full, then there are no ill effects of being a guarantor and in fact, it helps the guarantor by improving CIBIL score as well but it is the situation in which the primary borrower cannot or is not paying that the guarantor faces the following trouble:

  • Personal Assets at Risk – If the primary borrower defaults on payment, then the bank or financial institution will go to him first and ask for payment of the dues along with the applicable interest and penalty. In such a case, the loan is practically transferred to the guarantor, who will then need to find the means to repay the loan. 
    So even though you as guarantor did not borrow any amount directly you can be completely held liable for repayment in cases of default.
Must Read: 5 Reasons Why You Should Get a Personal Loan
  • Credit Score Impact – If the primary borrower is not servicing the loan on time – then the credit score of the borrower starts going down and his creditworthiness reduces. What you may not know is that as a guarantor his financial behavior will also affect your own credit rating and creditworthiness. The next time you go to get a loan for yourself you may not receive favorable terms such as high rates of interest due to such a low credit score.
  • Credit limit usage – When you stand as a guarantor on a personal loan, the credit rating agencies recognize it as a lien on your own lines of credit and so your own ability to get a loan gets reduced as you are already committed as guarantor towards this other loan.

How can you Safeguard yourself as a Personal Loan Guarantor?

If you have decided to help out your family or friend and be their personal loan guarantor – you can safeguard yourself at least to an extent by following a few tips.

  • Be aware of all the clauses of the loan agreement – There may be clauses on what will be the sequence in which repayment may be taken or in case if the primary borrower dies or any such extra clauses which may lay the liability at your feet.
  • Ask for a co-guarantor if possible – This reduces your personal exposure to financial loss and provides you with some level of protection.
  • If you can - Keep checking on the timeliness of repayments. It may prove to be difficult but as you are a guarantor it is your duty to yourself to check that the primary borrower is making his payments and no liability is going to befall you.
  • Make sure that the person you are becoming a guarantor for is someone who you can trust, and who will not take undue advantage of you.
Must Read: Different Types of Personal Loans in India

When do Financial Institutions Ask for a Personal Loan Guarantor?

When one will apply online for a personal loan such details will be given which will specify whether or not you are required to get a personal loan guarantor or not.

The financial institutions ask for a Personal Loan Guarantor if:

  • It is their company policy to do so
  • If they feel the age of the borrower is too much or the earnings of the primary borrower are unstable.
  • They can ask if the credit score of the borrower is poor. 
  • Any other reasons which they feel they are at risk of non-repayment. 

You should definitely think a million times before becoming the guarantor for someone and even then take on such a role only for the nearest and dearest of all. 
 

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