Guarantor Loans – Everything You Need to Know
If it’s difficult for you to get a personal loan due to a poor credit score or low income, a guarantor can help. A guarantor can be a friend or family with a good credit rating. But guarantor loans come with their own share of risks for both the borrower and the guarantor.
Let’s understand a little more about guarantor loans:
What is a guarantor loan?
A guarantor loan is usually a personal loan, where the borrower has the financial backing of another individual – the guarantor.
The person willing to be a guarantor promises the lender to make repayments on the loan if the borrower defaults or is unable to repay. Thus, the guarantor enables the lenders to loan the money to the borrower at a reasonable interest rate.
While a guarantor is a definite advantage to the borrower, there are a few concerns the guarantor should assess before signing on the dotted line.
Understanding the role of a guarantor
A typical guarantor is over 18 years and is a resident of the country where the loan is being processed. Guarantors usually have exemplary credit histories and sufficient income to cover the loan payments in case the borrower defaults. In guarantor loans, the guarantor’s assets may be seized by the lender in the event of a default.
Who can be a guarantor?
The guarantor can be a close friend or a family member. In most cases, parents act as the guarantor for their child who has a low income and/or poor or no credit history.
What are the concerns for the guarantor?
Being a guarantor poses a lot of concerns. Below are a few risks that a guarantor needs to consider before taking up the responsibility:
Tip: Sign up as a guarantor only for a trustworthy and known person.
- Credit History
A guarantor is involved in a loan transaction if the banks feel that the borrower has a questionable credit history or low income. Since the loan is approved based on the guarantor’s credit rating, a loan default can adversely impact the guarantor’s impeccable credit history.
- Financial Burden
If the borrower fails to make repayments on the loan, the guarantor has to step up and take responsibility for repayments. This can be a financial burden that may affect the guarantor’s long-term and short-term financial goals.
- Credit Score
Credit score helps lenders in their lending decisions. The ideal credit score lenders look for in an applicant is 750 or above. In case the applicant has a low credit score, banks may ask for a guarantor. A guarantor should be aware of the fact that if the borrower fails to repay the loan, the credit score of the guarantor and the borrower is affected. This may make it difficult for both – the borrower and the guarantor – to get loans in the future.
- Loan Details
The guarantor should try to find all the details about the loan, such as the loan amount, interest rate, method of interest calculation, EMI amount, and loan tenure. Having this information is important to stay prepared for possible future concerns.
How guarantors are different from co-signers
Guarantors Vs. Co-Signers
Both the guarantor and co-signer help the borrower in getting the loan approved, but their role is different.
A co-signer arrangement occurs when the borrower does not meet the income criteria of the lender. On the other hand, a guarantor usually steps in when the borrower has sufficient income but is struggling to get a personal loan due to poor credit history.
When an individual agrees to be a co-signer, the asset owned is shared between the borrower and the co-signer. Guarantors have no claim to the asset bought by the borrower.