Planning to be a guarantor? Read this before your emotions get the better of you and you put your credit health in trouble.
A Personal Loan is a type of unsecured loan for which you don’t have to submit any collateral or security. However, some lending institutions may ask you for a guarantor before they accept your loan application.
Usually banks ask for a guarantor only when they aren’t completely comfortable with the primary borrower’s financial standing and repayment capability. Having a guarantor for a loan implies that in the event of the borrower being unable to make repayments in time, the guarantor will have to cover up for the defaults.
Additional Reading: 5 Things You Must Know Before Signing Up As A Guarantor For Home Loan
So, a guarantor is not just a witness or someone who proves the authenticity of the borrower. Instead, he is the one who guarantees that the borrower will repay the loan. And in case the borrower doesn’t, then he or she will be held liable for the same.
Asking for a guarantor is, therefore, one of the ways that lending institutions employ to make sure that the money lent out by them is safe and secure.
Here are a few scenarios wherein banks may request for a guarantor:
- The borrower’s credit health does not meet requirements
- Unstable employment with frequent transfers to different cities
- Job stability is a concern
- Unstable income which brings a big cloud of doubt when it comes to repayments
- Poor academic background
There may be other reasons too. For instance, the requirement of a guarantor may be a part of the lending party’s rules and regulations. Also, not everybody can become a guarantor for a Personal Loan. There will be certain norms specified by financial institutions which a guarantor must meet.
Additional Reading: Things To Keep In Mind As A Loan Guarantor
Lenders’ Preference Of Guarantors
Most banks and other lending institutions have their own internal norms regarding who can become guarantors. Usually, they would prefer the guarantor to be an individual with steady income (which is ideally more than that of the principal borrower). This would make it easy for them to recover the outstanding amount in the event of a default.
In addition, lenders will also lean towards an individual whose credit rating is better than the borrower for the same reason stated above. A few lenders may insist that the guarantor and principal borrower should be working in the same organisation, so that their employer can be approached in case both parties default.
Few General Requirements
As mentioned above, lenders have the discretionary power to frame their own rules regarding guarantors. However, there are a few general (yet mandatory) requirements apart from the lenders’ preference. Here are a few:
- Guarantors should be at least 18 years of age
- He/she should have a good repayment history and should not have applied for bankruptcy ever before
- Guarantors should be of sound mind with functional mental capacity and be able to understand their responsibilities before signing the agreement
- They should have sufficient influence over borrowers so as to influence them to make payments in time throughout the tenure
- The individual signing as a guarantor should not have been forced, coerced, influenced or tricked into doing so
- Guarantors have the right to seek legal opinion before signing the agreement
- They should be made aware of the principal borrower’s outstanding loans, their accumulated gratuity and provident fund where applicable, and the details of the loan being applied for, which includes details such as loan amount, the rate of interest, the tenure and the EMIs to be paid
- Lenders should explain the rights and responsibilities in legal terms to a guarantor before they sign the agreement
- Guarantors must be provided a copy of the loan agreement after approval of the Personal Loan
Additional Reading: Becoming a loan guarantor? Know all the rules!
The Repercussions Of Signing Up As A Guarantor
Although being a Good Samaritan is admirable, you have to be extra careful especially when you’re signing up to be a guarantor, or you could pay a heavy price.
Let’s use the example of Mr. Rakesh Maan. Rakesh is a good soul working at an MNC in Bengaluru and earning around Rs. 20 lakhs annually. He is someone, who you could say, has ‘arrived in life’, having achieved great success both in his professional and personal life.
Anyway, here is the tragic incident that happened in his life. His brother wanted a loan of Rs. 20 lakhs for his son’s wedding. However, the bank required a guarantor for the loan. Rakesh’s brother approached him. Rakesh, knowing the financial condition of his brother and being the good-hearted man that he is, agreed to become a guarantor.
Three years later, Rakesh received a call from the bank demanding that he repay the loan amount borrowed by his brother since he is the guarantor. Yikes!
Quite a scary situation, isn’t it? Well, Rakesh signed up for it. When you sign up as a guarantor, you become as liable for the loan as the principal borrower. You are basically giving consent to the lender that you’ll be financially backing the borrower in case the borrower defaults.
Banks usually wait for a few months of default before they send a notice to the guarantor to take up the responsibility of clearing the loan. In case the guarantor fails to take up the responsibility, the bank will treat him/her as a ‘wilful defaulter’.
This will in turn lead to a bad remark in the guarantor’s credit report and a declining Credit Score. In short, the guarantor’s credit health will be affected negatively. And this will hamper his or her ability to get loans easily in the future.
The decision to become a guarantor is yours to make. But you need to factor in the risks that you’ll be taking too. After all, it is easy to ruin your credit health but extremely difficult to get it back on track.
Additional Reading: Loan guarantors be forewarned!
P.S. If you’re looking for a Personal Loan, we’ve got many options, even ones for which you don’t require a guarantor.