A personal loan is a kind of unsecured loan which you may borrow from the bank without pledging any security or collateral. However, some banks request a loan guarantor before lending the loan.
A personal loan guarantor guarantees you and your loan repayment. There are a plethora of things you should be aware of before committing to becoming a guarantor, which will help you navigate risk and your commitment.
Let us begin by learning more in detail about a loan guarantor!
When a person gets into a loan agreement with the loan borrower and pledges to repay the loan if the loan borrower fails to do so, the individual is termed a loan guarantor.
You are free to make anyone your guarantor; for example, a family member, a friend, a business partner, or a colleague can become your guarantor. However, the individual must fulfil all personal loan eligibility criteria to become a loan guarantor.
The primary requirement is that the guarantor should have a higher credit score so that if a default situation arises, your guarantor can fill in the requirements and prevent unpleasant consequences.
There can be instances when becoming a loan guarantor can be difficult, especially when it concerns your close kin. Therefore, before becoming a guarantor, it is prudent to understand the terms and conditions.
Here are a few things you can do before becoming a loan guarantor:
- Assess your borrower
Before you sign up as a guarantor, it is important that you assess your borrower carefully. Enquire about the reason for the loan, the interest rates, and more. You should do a thorough background check to understand if the individual is genuine. Also, importantly, speak to your borrower about his financial lifestyle, income sources, and more.
Remember, if you feel uncertain about your borrower, you can always choose to back out.
- Go through the terms and conditions before signing the agreement
When considering being a guarantor, you should read the personal loan documents carefully and learn about the terms, which are likely to fall on you as a guarantor. This can help you make better decisions and avoid sticky situations in the future.
- Speak to the borrower and assess their needs
It is imperative to know about the intentions of the borrower. You can speak to them about their requirements and how they plan to repay. You should also be aware of the borrower’s credibility and inflow of cash.
- Keep track of the repayment of loans
If the borrower for whom you serve as the guarantor fails to repay the instalments in time, it is likely to affect your credit score. This can make it difficult for you to obtain loans in the future. To avoid such situations, it is advisable to regularly keep track of the repayments made by the borrower.
- Ask for a co-guarantor
Asking for a co-guarantor can be a wise move. This reduces your liability and exposure and can help dilute the overall risk associated with a loan.
- Alternative guarantor
If you wish to step back as a guarantor during the course of the loan, you can ask the borrower to look for an alternative guarantor.
This should ideally be done before getting into a loan agreement by the borrower so as to prevent any confusion in the future.
- Second loan initiated by the borrower without consultations
If the borrower takes up a second loan from the bank without consulting you first, you can request the bank to relieve you as a guarantor. However, you will still be liable for the first loan as a guarantor.
- Plan for contingency
Sometimes, even after thorough research and background checks, a borrower may default on his payments. The burden of repayment may then fall on you, the guarantor. And thus, it is important to be prepared for such sticky situations. Access your own creditworthiness and analyse if you can pay the loan in its entirety if there is a default.
If you are drawing an unsecured loan, you will likely need a loan guarantor. You can approach your family, friends, and close kin to become your guarantor. However, they will need to pass all eligibility requirements and have a healthy credit score to guarantee on your behalf. If you decide to become a guarantor, consider all factors carefully before signing up, like the borrower’s cash flow, previous history, and more. Remember that a borrower defaulting in such a situation can hamper your credit score.
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