An individual generally takes a quick loan in times of need or to meet some important, large expenses. A personal loan is convenient to take and easy to obtain with many instant personal loan apps in the market.
Taking a personal loan also involves providing a repayment guarantee to the lender. As personal loans are collateral-free, you don’t have to pledge anything as security. But sometimes, when an applicant doesn’t meet the eligibility criteria such as a credit score above 750, lenders may ask the borrower to get a personal loan guarantor in order to disburse the loan.
Who is a personal loan guarantor?
A personal loan guarantor is the one who signs a loan agreement along with the borrower and stands as a guarantor of her loan repayment. A guarantor can be a family member, a well-trusted colleague, or a close friend.
It is a big responsibility to become someone’s personal loan guarantor. By accepting that position, you accept that you will make the repayment if the primary borrower fails to repay the loan.
If you are asked to become someone’s personal loan guarantor, then there are some things you must know before you agree.
What are the responsibilities of becoming a personal loan guarantor?
As mentioned earlier, a personal loan guarantor acknowledges that if the borrower fails to repay, she will pay her debt. There are many other impacts as well of signing on as a personal loan guarantor of someone you know well.
In a positive case scenario where the borrower repays the loan on time and in full, there are no bad effects of being a guarantor. And it even helps you improve your CIBIL score.
In a situation where the primary borrower does not or cannot repay that you, as a guarantor, face some of the troubles as listed below:
- Adverse effect on your credit score: If the primary borrower does not service her loan on time, the credit score of the primary borrower and her creditworthiness decreases. But along with that, as a guarantor, your financial credibility also takes a hit. Because of her poor economic behaviour, your credit rating and creditworthiness reduce. This results in you not getting favourable interest terms the next time you go out to get a loan.
- Your assets can be at risk: When the primary borrower does not repay the loan, the lender would go to her and ask for payment of dues with applicable interest and penalty charges. Again, the loan gets practically transferred to you, as you are the guarantor, and you may be asked to repay the loan. So even when you did not borrow any money directly, as a guarantor, you are completely held liable for repayment in case of a non-repayment.
- Your credit limit reduces: As you stand as a guarantor on a personal loan for someone, the credit agencies make a note of it and consider the loan as a lien marked on your lines of credit. So, your own ability to get a personal loan reduces.
How to safeguard yourself as a personal loan guarantor?
Say you have made a decision to help out your friend or family member for getting a much-needed loan by being their personal loan guarantor. In this situation, you can safeguard yourself to some extent with the help of the following tips:
- Ensure that the person for whom you are becoming a loan guarantor is someone who you can trust and would not take advantage of you.
- You can ask for a co-guarantor. Having another co-guarantor reduces your exposure to financial loss. This provides you with some protection.
- Understand and stay aware of all the clauses of the loan agreement. There can be clauses like the sequence in which repayment must be made, what happens if the primary borrower dies, etc. Any such clause can lay the liability at your hand.
- If possible, keep a check on the timelines of repayments made by the primary borrower. As you are a personal loan guarantor, you must check that the borrower is making timely payments and no liability is going to come to you.
Lenders may ask for a personal loan guarantor when it is their company policy, the borrower has a poor credit score, the borrower is aged, or when the earnings of the borrower are unstable.
Online lenders may also ask for a personal loan guarantor when one applies for a quick loan online on an instant personal loan app. Such details are available in the loan application form that specifies whether one must get a personal loan guarantor.
So, think long and considerably before becoming a personal loan guarantor for someone. Take on such a role only for a select few that are very close to you.
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