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Tata Capital > Blog > Everything You Need to Know About Guarantors In Personal Loans

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Everything You Need to Know About Guarantors In Personal Loans

Everything You Need to Know About Guarantors In Personal Loans

A personal loan is easily available these days. It is an unsecured loan where one doesn’t have to put up any collateral as security. Nowadays, many banks and financial institutions offer pre-approved personal loans to customers with good credit scores. However, some loans cannot be approved unless a guarantor vouches for the applicant’s repayment capacity.

Who is a guarantor? What is a personal loan with a guarantor?

In a personal loan, a guarantor means a person who proves the authenticity of the borrower. Such a person acts as a witness and provides an assurance of the borrower’s credibility to the lender. The guarantor takes a guarantee on behalf of the borrower to repay the loan with interest if the latter defaults in repayment. In such a scenario, the guarantor is legally bound and liable to repay the loan.

Why do financial institutions offer personal loans with guarantors only?

By offering a personal loan with a guarantor, the lender feels more assured about the repayment of the loan.

Here are a few situations when a lender may be compelled to ask for a guarantor:

  • If the borrower is not financially secure enough to repay the loan.
  • If the borrower doesn’t have a stable job and keeps changing jobs frequently.
  • If the borrower’s credit score is not good enough to get a personal loan.
  • If the loan amount is beyond a certain limit.
  • If the lender is not convinced or confident that the borrower will repay the loan.
  • If the borrower already has a number of outstanding loans.
  • In some exceptional cases, a guarantor may be required as it is in accordance with the rules and regulations of the financial institution.

Responsibilities of a guarantor for a personal loan

Before becoming a guarantor, a person should understand the implications it may have. On becoming a guarantor, the person will become equally liable as the borrower. In the case of a default in payment by the borrower, the lender (bank or financial institution from where the loan was taken) can recover the amount from the guarantor. In such circumstances, the lender can also take legal action against the borrower as well as the guarantor.

The guarantor’s monthly income and other assets can also be attached to recover an outstanding loan. This is why most banks have guidelines about guarantors; for example, the guarantor should be in a better financial position than the borrower.

On the positive side, if the borrower repays on time, the guarantor’s credit score also increases. However, if the borrower defaults in repayment, the guarantor’s credit score will take a hit, even if the guarantor repays the other loans on time. On becoming a guarantor, an individual’s credit limit is also reduced.

Things to keep in mind before becoming a guarantor

Here are a few tips that an individual must follow before becoming a guarantor:

  • Ensure that the primary borrower is trustworthy.
  • Check whether the borrower will be able to repay the loan on time.
  • If the guarantor is planning on making a big investment for which they might need a loan in the near future, they should reconsider being a guarantor. Guarantor personal loans impact the guarantor’s credit score as well, which might negatively impact their ability to get other loans in the future.
  • Know why the primary borrower is applying for a loan and assess the risk involved.
  • Ask for a co-guarantor. This way, in case of default in repayment, the entire financial burden will not fall on one guarantor.
  • Read the loan agreement thoroughly and understand it. The guarantor should know what the implications will be if the borrower is critically ill or no more in the future to be financially prepared in such scenarios.
  • Keep checking with the borrower about the progress of their repayment.

Last words of advice

Before signing the loan agreement of a guarantor personal loan, the guarantor should chalk out their contingency plan in case the primary borrower is unable to repay the loan and the burden of repayment falls on the guarantor. Before agreeing to be a guarantor, one should consider factors like the creditworthiness of the primary borrower, their own short-term or long-term financial goals, the borrower’s repayment capacity, the amount of loan etc.

Additionally, the guarantor may take precautionary measures by asking the borrower to invest in loan insurance. This will protect the guarantor in case the borrower fails to repay the loan. If you are looking for a personal loan, consider getting a instant personal loan. Benefit from the low processing fees, simple paperwork, and easy disbursement.

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