Personal Loan Guarantor

Personal loans are generally taken by people who need money instantly. To avail a personal loan, one must meet the eligibility criteria laid out by the lenders. However, there could be times when an individual may fail to satisfy them. In such cases, they can secure a loan by presenting a personal loan guarantor. A personal loan guarantor basically gives his/her guarantee to the lending institution that either the borrower or the guarantor themselves will repay the loan if the borrower defaults. 

The reasons why a lending institution may ask for a personal loan guarantor are as follows:

• It is their company policy.

• The income of the primary borrower is unstable in nature.

• If the primary borrower is too old/a senior citizen.

• If the credit score of the primary borrower is too low.

• Any other reason that may make the lender question the creditworthiness of the borrower.

• Affects your CIBIL score: Being a personal loan guarantor can either affect your CIBIL score positively, or negatively. If the person for whom you are the personal loan guarantor pays off his or her loan on time, your CIBIL score would improve. But, if the borrower pays his personal loan EMIs late, or defaults on them, it will reduce your CIBIL score. This may make it harder for you to secure a loan for yourself in the future.

• Puts personal assets at risk: If the loan is paid off by the person on time, everything will be just fine. But, on the off chance, if the primary borrower is unable to pay the loan, the lenders will come to you. In such a scenario, you may have to pay off a huge sum of money by either taking it from your own bank account, selling any of your belongings or taking a loan yourself.

• Reduces your credit limit: Becoming a personal loan guarantor will mean that the credit available to you will reduce. This will happen because in the eyes of the credit rating agencies, becoming a guarantor is as good as taking a loan for yourself. If you are a guarantor for someone, your available credit limit will only come back to normal when the personal loan has been paid off in full. This too can make taking a loan for your own personal uses really difficult.

When you sign up as a guarantor to their personal loan, you are legally bound to become liable for the loan as the principal borrower in case of default payments. If the borrower fails to repay the loan, the following series of events happen:-

• Banks will send a notice to the guarantor who is legally bound to take up the responsibility of clearing the loan. In case the guarantor fails to do so, the bank will treat him/her as a ‘wilful defaulter’.

• This will consequently reflect poorly on the credit rating of the guarantor which will then hamper their ability to get a loan easily in the future.

Hence, a guarantor must ensure that he/she regularly checks up on the borrower they are a personal loan guarantee for, and confirms the payment of interests and dues by them.

It also must be noted that a guarantor is free to withdraw his/her personal loan guarantee provided by them to the borrower at any time by approaching the bank.

Given the risks associated with becoming a personal loan guarantor, you should ideally refuse to become one. But, if the person is someone who is close to you, you must try to safeguard yourself as a guarantor using the following ways:

• Ask for a co-guarantor: If possible, you must ask the person who has asked you to be their personal loan guarantor to bring a co-guarantor on board. This will reduce your personal exposure to the loan. And, if by any chance, the borrower defaults, you will only be liable to repay half of the outstanding amount.

• Be aware of the clauses in the loan repayment terms: There is a chance that you may have to repay the loan entirely under more circumstances than one as a guarantor. Some lenders include clauses such as one in which the guarantor will be liable to repay the outstanding amount in case the primary borrower dies. Which is why, it is advisable for you to look into the repayment terms yourself if you are about to become a personal loan guarantor for someone.

• Keep track of repayments: As a guarantor, you must keep checking with the borrower, or the lender, if the personal loan is being repaid timely. It should be your duty to do so to ensure that their liability does not befall on you from out of the blue.