When a friend or a close relative seeks financial help, it is almost impossible to refuse them. But should you go ahead with being their guarantor for a personal loan? Remember, being a guarantor is not merely a social obligation, it is also a way of formally assuring the bank/lender that the borrower will pay off their dues on time. If, however, they fail to meet their financial commitments; you will be required to handle that obligation on their behalf. So, before agreeing to become a loan guarantor, it is important to understand the gravity of the financial commitment that you’re about to make. If you are having second thoughts, here are some things you need to know.
Understand the Concept of Being a Guarantor
If you think being a guarantor for a loan is a simple formality, you’re probably wrong. This move will have its fair share of consequences, and if the borrower defaults, these consequences won’t be favorable. That said, it doesn’t mean you shouldn’t be a guarantor for loans. If a bank is seeking a guarantor, it is not because they assume that the borrower will default. In most cases, financial institutions require a guarantor when the final loan amount crosses their approved limit. But there aren’t any fixed guidelines to why guarantors are required, and almost every bank has its own set of terms regarding this. So, if you’re applying as a guarantor for loan clarify with the bank for the reason of it.
Guarantors and Co-Borrowers Aren’t the Same
Very often, people interchangeably use the terms guarantors and co-borrowers. But such is not the case. The co-borrower of an instant personal loan has the same obligation to pay as the primary borrower. The loan guarantor will only be considered here when both the primary borrower and the co-borrower have failed to repay the loans. The bank will ask you to pay on behalf of the borrowers if they feel there isn’t any viable way to recover the funds.
Your Credit Score is Important
Yes, your credit score has a part to play even when you’re just being a loan guarantor. Usually, banks ask you to submit your financial documents depending on their unique requirements. In most cases, you’re asked to send a full list of your assets and liabilities. Here, your credit score will also be considered. That said, it is important to understand that your score can take a hit in the event of a default or irregular payment. So, unless you’re confident about the financial habits of the borrower, do not choose to be a borrower for them.
It is Not Simple to Sign Out
Once you’ve decided to be a guarantor, withdrawing from the responsibility isn’t a simple task. Due to this reason, you should only go ahead with the move after assessing the situation carefully. To withdraw as a loan guarantor, you’ll need a go-ahead from a lending institution or bank. Sadly, these institutions will only agree with such changes, if an alternative guarantor is willing to walk in your shoes.
Owing to the complexities involved in the process, we’d suggest you proceed with caution, every time a friend requests you to be a guarantor.