Is Being a Personal Loan Guarantor a Good Idea?

admin | August 18, 2021

Personal Loan

Being a guarantor showcases your good Samaritan spirit but is also considerable risk. Being liable for someone else’s debt can have severe consequences in case of a default. Here is how you can protect yourself from such possibilities.

Nowadays, loans have become more accessible to people as borrowing funds is a much easier process due to the different kinds of loans in the market.

Among the various loan options available to customers, online personal loans are one of the easiest and most efficient ways to secure finances for unexpected expenses.

This is primarily because they are collateral free credit.

With today’s technological advancements, it has become possible to avail of an online personal loan.

As mentioned before, although there is no collateral attached to these loans, some lenders require guarantors. They are typically asked for in cases where:

The principal borrower has a low/unstable income.
The borrower has previously failed to repay loans.
The lender thinks the borrower has a low loan repayment capacity.
The borrower has a bad credit history.

On the borrower’s end, they can use a personal loan interest rate calculator before submitting a loan request.

This will help them determine whether they will be able to afford the loan they plan on taking. By using this tool, they can also ensure decreased sanction periods.

Responsibilities of a Guarantor

Before guaranteeing someone’s personal loan, guarantors must understand the financial and non-financial implications of it. The guarantor is just as liable for the repayment of the loan as the principal borrower.

If the person you have guaranteed fails to pay the amount back, you are legally obligated to repay the loan.

This serves as an additional layer of security for lenders. Since the loans are unsecured and collateral-free, an additional guarantee from another party allows them to recover their money and mitigate their risks.

This can also lead to lower interest rates than what the borrower might get on their own, as the repayment capacity has increased.

In case of non-repayment, the court is obligated to seize the guarantor’s monthly income and other assets that may be attached to the loan liability.

These heavy consequences are the primary reason why lenders have specific guidelines about how the guarantor’s financial position should be better than the borrower.

If the guarantor also fails to take accountability for the disbursement of the loan, then they may have to face legal action and repercussions.

Factors to Consider Before being a Guarantor

A potential guarantor should be wary of confirming their position and must consider a few things. These factors include:

Making sure that you are a guarantor for someone who is trustworthy and whom you are familiar with.
Ensuring that there is no chance of a sudden financial burden that might disrupt your financial plans.
Your involvement in such a situation will reflect in your credit history, and you cannot break the contract in case of a default.
If the borrower’s credit score is below 750, the requirement of a guarantor might arise. As a guarantor, you should know that if there is an issue with repayment of the loan, your credit score and the borrower’s will decrease.
A lower credit score due to this makes future possibilities of getting a loan difficult.
Before signing up as a guarantor, you should inquire about the loan amount and what it is being used for, the method of interest calculation, and the number of installments.
Having prior knowledge about the loan details can indicate potential concerns that might arise in the future.

Before helping someone in need, you must first look into the points above. They ensure you stay better prepared for any kind of borrower, preserving your financial health in the process.

Documents Required to be a Guarantor

As a guarantor, the responsibility of providing proper personal loan documents to secure a handsome interest rate falls on your shoulders. To get through this procedure, you need to provide the following documents: