Asked to be a Guarantor of Loans? Understand the Risks Involved

Borrowing money is getting easier, with increasing types of loans on the market and online access. Due to advances in technology, one can take advantage of online personal loans immediately. Personal loans are an unsecured form of debt that doesn’t require collateral or security to be pledged. For certain situations this is valid. But in some situations, where the lender is not one hundred percent definitive for the financial security and repayment capability of the primary borrower, they may request a guarantor.

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Who is a Loan Guarantor?

A guarantor is an individual who assures or guarantees that the borrower will repay the loan in due time. He is a person who assures the lender that he/she will make good of the agreement by repaying the loan in case the applicant is unable to repay the loan. A guarantor is, therefore, an individual who will cover the defaults if the primary borrower is unable to reimburse the loan. In the case that the primary creditor defaults on his loans, the guarantor is automatically responsible to repay the lender for the unpaid sum.

When does a lender ask for a guarantor?

Every lender has a set of specific payment gateway. For various kinds of loans, the conditions are different. A secure financial background and strong credit score are the prime requirements for any loan approval. Thus, a lender may request a guarantor in the following circumstances:

Financial history: When the moneylenders are not happy with the credit history of the candidate or when the candidate’s FICO rating is low, they may request a guarantor.

Unstable income patterns: While thinking about a credit application, moneylenders additionally check whether the candidate has a consistent salary. In the event that the candidate has a precarious business history has switched too many jobs, they may request a Guarantor.

Domicile history: The lenders can look at the applicant’s domicile history, and if they find that there are frequent relocations, a red flag will be raised and a guarantor will be requested.

The approach of the loan specialist: Even requesting a guarantor will only be a matter of the company policy of the lender.

Should I Become a Loan Guarantor?

While helping an individual is a good deed, before signing up as a guarantor you have to consider the risks involved. An awareness of the monetary risks involved when functioning as a guarantor is especially necessary. If the primary applicant defaults on his / her obligation you will be willing to face the repercussions of the deal.

Few points should be kept in mind by all involved parties before a guarantor enters the contract –

  • The guarantor will be entering into this contract honestly. He/she was not supposed to be coerced, manipulated, or conned into doing so.
  • The guarantor must be mentally sound and functional. He/She should be able to understand the risk involved and willing to take responsibility for the same.
  • The guarantor must have complete knowledge of the financial history of the potential customers. The number, term, and interest rate of the loan shall be told to him/her. In case the claimant defaults, he/she should also be informed of the responsibility that he/she may face.
  • The lender shall advise the guarantor of the terms and conditions of the agreement. Before completing the Deal, he/she must be made aware of his / her legal responsibilities.
  • The guarantor shall have the right to consult with a legal attorney prior to signing the deal.
  • After it has been signed a copy of the loan agreement will be given to the guarantor.

How can becoming a guarantor affect you?

Effect on the future prospects for loans: If you decide to become someone’s loan guarantor, the eligibility for loans will be reduced. If you are a guarantor for another, your eligibility is usually reduced by the creditor to the degree of the loan that you provided, as the responsibility will be passed to you by the initial applicant in case of default.

Effect on your credit history: The credit report should mention that you are a guarantor on a loan. In reality, banks may even access your credit report for valid application as a guarantor. If the applicant defaults on the loan for whatever cause, the information would appear on the credit report as well.

What should you do?

Do not become a guarantor unless the loan is for your spouse or child. Avoiding such huge financial liability even at the cost of sounding rude to a family member or friends makes sense. You can ask the creditor to release you from becoming a guarantor if you are already a guarantor for a friend or relative, but are not sure of his / her repaying ability. But this can only happen when he chooses a particular guarantor. However, in an attempt to cancel the loan, you can not contact the bank; only the creditor may make the request. Additionally, some banks do not allow guarantor change.

Conclusion

As a guarantor of personal loans, you will consider the risk involved in entering into the agreement. You need to assess the implications to be confident you can rely on the applicant to repay his loan on time. You must be prepared financially and psychologically to meet the consequences in the case that the creditor can not recover his debt. So know the risks carefully and trade carefully!

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