At some point in your life, a friend or a relative may ask you to become their loan guarantor. People often agree to such requests out of social obligations but often don’t realise their own liabilities.
Lending institutions such as banks and NBFCs insist upon a guarantor for various reasons such as the borrower’s credit history or financial position being weak, or his income being inadequate for loan eligibility.
There are broadly two roles that a guarantor plays. A non-financial guarantor has the responsibility to liaise between the bank and the borrower to resolve problems such as delays in payments. But a financial guarantor could have the responsibility to cough up the loan payments in case the borrower defaults. This could be the proverbial albatross around the guarantor’s neck.
Additional Reading: 7 Things To Consider Before Opting For A Home Loan In Your 20s
If you are contemplating signing up as a financial guarantor for someone’s Home Loan, here are five things you should consider.
- Why the borrower needs a guarantor
Banks usually insist on getting a guarantor when a borrower’s financial standing is questionable. So, make sure you understand the reason why the borrower is being asked to get a guarantor. You must also ensure that the borrower is capable of repayment before you become part of the arrangement, unless you are prepared to undertake the liability of repayment.
- What your liabilities are as a guarantor
The reason why banks insist on getting a guarantor is to ensure that the money that’s being lent out is recovered. So, apart from assessing the financial stability of the borrower, you must also take a good look at your own financial position so that you are not caught off guard in case of a default by the borrower. If the borrower defaults, you will have to pay his EMIs as well as late fees, if applicable.
- Defaulting will impact your Credit Score as well
As a guarantor you risk your own Credit Score if the borrower defaults. First of all, you must know what your own Credit Score is and whether it can afford to take a hit. (Click here to get your Credit Score instantly.) If you already have a low score, you may want to avoid being the guarantor. Irregular payments by the borrower will erode your Credit Score.
- Your own loan eligibility will be reduced
As a guarantor, you have an increased liability. So your own loan eligibility will reduce. Home Loans being long-term loans, you may find it tough to get a loan if you wanted to buy a property yourself. Only if you’re sure about not having to take a loan in the near future should you step in as a guarantor.
- What is the tenure of the loan
Being a guarantor, you will be tied to the Home Loan until it’s fully recovered. And since your home loan eligibility is reduced for the tenure you act as a guarantor, it is imperative to learn about the loan tenure before you sign up.
Being a loan guarantor comes with many financial liabilities, therefore you must exercise care before rushing into such a tricky arrangement.
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