Nowadays, everyone has a loan. Some people take loans to start their businesses; some people take loans to help create changes in their businesses, and others take loans for personal use for other wants or needs. However, there can be instances where one gets declined a loan from a lender due to a low CIBIL score or for other reasons. This is where a Loan Guarantor can help. A Loan Guarantor is someone who promises to repay the loan if the actual borrower fails to repay the loan. In this blog, we will discuss who a Loan Guarantor is, how one becomes a guarantor in a Personal loan, and other factors concerning a Guarantor in a Personal loan.
Who is a Loan Guarantor?
An underwriter, most commonly known as a loan guarantor, is an individual who has agreed to take responsibility for repaying the loan amount if the primary borrower of the loan defaults on repaying the loan amount. The loan guarantor is like an assistant or a support for the loan, providing an extra protection to the lender for repayment of the debt. If the borrower has a low CIBIL score or there is some issue in the approval of their loan, a loan guarantor increases the chance of approval for the primary borrower.
Why do Lenders Ask for a Loan Guarantor?
The lenders ask for a loan guarantor to reduce their risk of giving a loan to a borrower who seems a bit doubtful of repaying the loan amount. Loan Guarantors are more commonly required for people who do not have a strong history of repaying the loan amount.
The lenders can also ask for a Loan Guarantor in situations like:
- When the primary borrower has a very low CIBIL score.
- The history of repayment is not strong and clear.
- If the financial condition of the borrower is low.
- When the loan amount is too high.
- If the primary borrower has an unstable employment history.
Eligibility and Requirements for a Loan Guarantor
| Eligibility Criteria | Requirements |
| Age | The Loan Guarantor must be over 21 years of age. |
| Creditworthiness | The Loan Guarantor must have good financial stability and a credit history. |
| Relationship with the borrower | The person who is becoming a loan guarantor should be related to the borrower, such as a family member, close friend, or someone whom they trust. |
| Separate Bank Accounts | It is necessary for the borrower and the lender to have a separate bank account. |
Risks and Responsibilities of a Loan Guarantor in a Personal Loan
As a loan guarantor, there are some specific responsibilities and risks attached to it. These risks and responsibilities are mentioned below:
The responsibilities of an Individual as a Loan Guarantor:
- Repayment Obligation: As a loan guarantor, your first responsibility is to repay the loan amount, which includes the fees, interest, and penalties, if any, on defaulting for payments.
- Signing a Legal Contract: Since you have agreed to be a loan guarantor, you are required to sign a legally binding contract with the lender. This contract contains all the terms and conditions for a guarantor.
- Financial Disclosure: Since you are a guarantor, the lenders will examine your financial stability, creditworthiness, and assets to make sure that you can cover the loan amount if needed. So you have to provide the lender with all of your personal financial details, such as income and bank statements.
An additional tip: Since you are the loan guarantor, it is advisable to monitor the borrower’s repayment behaviour and the loan balance to be prepared for a potential default.
The risks involved as a Loan Guarantor in a personal loan:
- Pay back the entire debt: If the borrower cannot make the loan repayments, you will have to pay the whole loan amount plus the interest on it. If you too fail to make payments, the lender can take legal action or seize your home or car if used as collateral for the loan.
- Risk of getting a loan approval: If in the future, you apply for a loan, you will have to mention to the lender that you are or were a lender on other loans. This might affect the lender’s decision to give you a loan, even if the loan that you have guaranteed is being paid back.
- Your credit score can get affected: As you are a loan guarantor on a particular loan, if the primary borrower or you too default on payments, it will negatively be marked as a default on your credit report. It can also get difficult for you to borrow a loan in the future.
Precautions to be taken before becoming a Loan Guarantor
- Understand the Borrower’s Financial Situation: Always ensure that you have a clear understanding of the borrower’s financial health and their ability to repay the loan.
- Review the Agreement Thoroughly: Always read and understand every word and term mentioned in the contract before signing to become a loan guarantor.
- Limit Your Liability: If possible, it is always good you limit your liability to a specific amount or period.
- Keep Records: Always keep a record of all the types of communications and documents that are needed and related to a guarantor. This can be useful if disputes arise.
Conclusion
A loan Guarantor is a person who is related to the borrower or someone whom the borrower trusts. The lenders need a loan guarantor in order to reduce their risk of loan repayment if the lender can see that the primary borrower does not have a strong credit history. It is always better to know the risks, responsibilities, and precautions involved before signing up as a Loan Guarantor.
