Is it okay to become a personal loan guarantor?

personal loan guarantor

Individuals avail a personal loan under financial emergencies or need to fund a significant expenditure. Most financial institutions approve a personal loan readily if the applicant meets all the eligibility criteria. – personal loan guarantor

Since a personal loan is unsecured, that is, the lender takes no collateral to approve the loan, when the applicant falls deficient in meeting the eligibility criteria – such as their credit rating is lower than the expected limit, the institution may approve the loan on the condition that someone becomes a personal loan guarantor for the borrower.

This way, the financial institution gets an assurance of repayment of the loan even though they do not trust the borrower’s credibility completely.

What is a personal loan guarantor responsible for?

  • A personal loan guarantor faces a similar liability as the principal borrower. If the principal borrower defaults on the payment, the financial institution has the legal authority to claim the remaining payments from the guarantor. Thus, a guarantor serves as additional security to these unsecured loans.
  • A guarantor becomes legally liable to pay off a borrower’s debt in case of defaults. The lender can take legal action against the guarantor to recover any losses. Hence, a lender always chooses a guarantor with a better credit rating, higher income, and good financial history than the principal borrower. This exposes the guarantor’s income and assets to the loan liability.
  • A guarantor is responsible for paying the principal loan amount in case of default by the borrower and the interest payments and any other additional charges levied.
  • Any default by the borrower will also drive down the guarantor’s credit score. 
  • An individual, who becomes a guarantor for a loan, reduces their credit limit, as financial institutions consider a guaranteed loan a lien for credit.

What precautions should one take when accepting to be a personal loan guarantor?

  • The first precaution to being a guarantor is to think with your mind rather than let emotions cloud your judgement. One should only become a guarantor for a person they trust when the borrower can repay the loan.
  • Inquire about the cause of the loan from the borrower. See if the cause is valid and check the borrower’s credit history. This will provide insights into their creditworthiness.
  • Being thorough with the contract of loan is always a wise decision. One should pay close attention to clauses, wherein in case of inability of the borrower to pay, but not default, such as if the borrower dies, etc., what liability will the guarantor face.
  • Two is better than one- a guarantor can ask for a co-guarantor. This would minimise their financial losses and liabilities.
  • Checking that the borrower is making timely repayments against the loan is something every guarantor should do- precaution is always better than cure.
  • One should only become a guarantor to a loan if it is within one’s capacity to repay it with interest and other charges. A personal loan interest rate is usually higher than unsecured debt. Some lenders have personal loan interest rates higher for a guaranteed loan as the credibility of repaying the loan of the primary borrower comes into question. Thus, the guarantor should verify every detail before accepting the role of the guarantor.

Most often, our relatives or close friends ask us to be the guarantors for their loans due to varied reasons ranging from lower credit ratings, unstable employment in the past, frequently transferring cities or too many outstanding loans. These are when our emotions get the better of our judgement, and we give in. But being rational in these times would benefit the individual in the long run. 

Being careful is always wiser. Reading through all the loan related documents and being aware of the liabilities and consequences is better than facing the music unaware.