A personal loan is usually taken during financial emergencies to meet large and important expenses. It is easy to get and convenient to use, since you need not specify the end purpose. But, a personal loan involves a repayment guarantee. If the borrower does not have a credit score above 750, or if he is involved in a high-risk job, is nearing retirement, has a bad credit history, or has a low income, then lending institutions may require the borrower to have a personal loan guarantor before loan disbursal.
Who Is A Personal Loan Guarantor?
A personal loan guarantor is somebody who will enter into a loan pact with the borrower and stand as a guarantor for the repayment of the loan. This person can be anybody like a family member, colleague, or a friend who is trustworthy. If you become a guarantor, you will be responsible to repay the loan if the primary borrower defaults.
What Are The Situations Under Which A Bank Asks For A Guarantor
- When the loan amount exceeds a particular limit, the bank will ask for a personal loan guarantor. This is because the risk involved is higher.
- When a borrower’s credit health does not meet the necessary requirements, the bank will ask for a loan guarantor. This is because giving a loan involves a good amount of risk in this case.
- When employment is not steady and when one has changed jobs often, the bank may ask for a personal loan guarantor.
- When the income is unstable, the lender gets a doubt whether the borrower can repay on time.
- When the applicant’s age is advanced, the bank sees some risk involved in lending a personal loan. As the age is advanced, the likelihood of repayment decreases.
- When the applicant is self-employed and earns less than the minimum income level
Things You Must Know Before Becoming A Personal Loan Guarantor
By accepting to become a personal loan guarantor, you are accepting the responsibility of repaying the loan back if the primary borrower defaults. So, it is essential to know the risks and responsibilities associated with becoming a personal loan guarantor.
Risks involved as a personal loan guarantor:
- Personal Assets At Risk: If the borrower defaults on loan repayment, then the bank will first contact him for loan repayment along with the applicable penalty and interest. In this scenario, although you as a personal loan guarantor have not borrowed the money, you are liable to repay the entire loan amount. The responsibility is transferred to you completely.
- Impact On Credit Score: If the primary borrower is not repaying the loan on time, then the credit score of the borrower goes down and his creditworthiness decreases. His financial indiscipline will affect your creditworthiness also as a personal loan guarantor. The next time you apply for a loan yourself, you may not be able to get favorable terms for the loan. The interest rates may be high or you may not get the required loan amount.
- Credit Limit Usage: When you are a guarantor for a personal loan, the credit rating agencies consider it as your own line of credit. So, when you are applying for another line of credit, the credit rating agencies will evaluate your application based on the fact that you already have a debt to be repaid.
- Check the type of guarantor you are going to be: Lenders ask for two types of guarantors – non-financial guarantor and financial guarantor. Non-financial guarantors are those whom the lender reaches out to in case they are unable to contact the primary loan borrower. Whereas, a financial guarantor must submit financial documents as collateral and agree to be responsible for the repayment of the loan if the primary borrower defaults. So, a greater risk is involved as a financial guarantor.
How Can You Guard Yourself As A Personal Loan Guarantor:
If you have decided to become a personal loan guarantor, you can safeguard yourself to a certain degree.
- Be acquainted with all the clauses of the loan agreement: There will be clauses on which the repayment responsibility will transfer to you. For instance: if the borrower passes away, and so on.
- You can ask for a co-guarantor: You can ask for a co-guarantor for your personal loan. This reduces your exposure to financial loss and helps in safeguarding yourself with some level of protection.
- Check on the timeliness of the repayments if you can: Keep checking if the borrower is making timely repayments. It may be difficult but as a guarantor, it is your responsibility to check if the borrower is making timely repayments and that no liability befalls you.
- Analyze the reason why the borrower needs a guarantor– This will help you in getting an understanding of the credit history of the borrower. If it is extremely poor, you may have to rethink about becoming the guarantor.
What Happens When The Borrower Does Not Repay The Personal Loan?
When you agree to be a guarantor to a personal loan, you become liable to pay the loan in case the borrower does not. So what happens when the borrower does not repay the loan? A sequence of happenings follows:
- Banks generally send a notice to the guarantor to take up the responsibility of paying off the loan. If the guarantor fails to take up the responsibility, the bank will regard him as someone who has defaulted intentionally.
- This in turn reflects badly on the credit score of the guarantor, which affects his or her ability to get a loan in the future.
Becoming a personal loan guarantor does not affect you as long as the loan is repaid on time by the borrower. In fact, it improves your credit score if the borrower repays the loan on time. However, if the borrower defaults, then you are at risk. Before you become a personal loan guarantor, it will be good to know the things mentioned above.