Most loan borrowers fall into the middle-income bracket, where a lender may require a guarantor. Adding a guarantor was almost mandatory for financial institutions until the 1990s. But now, they may request one for applicants with a high-risk profile.
The need for a loan guarantor
The need for a loan guarantor can occur when:
- The loan you want exceeds the maximum limit
- You lack financial resources
- You are elderly, about to retire or have an unstable job
- Your salary is less than the predetermined minimum income criteria
- You have a poor credit history/score
Things to know before signing on as a loan guarantor
1. You are contractually obligated as a Guarantor
As a loan guarantor, you are legally obligated to repay the online personal loan, plus interest and other fees. A “willful defaulter” and their guarantors will face legal action from the court.
2. To foreclose a loan, the court may attach your assets
The court may attach a guarantor’s assets to cover the loan and provider losses.
3. Financial and non-financial guarantors
A financial institution may request either type of guarantor. A non-financial guarantor is required for basic purposes, such as contacting the primary borrower if they are unavailable. In the case of a financial guarantor, however, their financial documents are reviewed. Then, they are financially obligated to repay the borrower’s debts if they default.
4. Your loan eligibility is impacted
As previously stated, the law holds the guarantor legally liable for the loan as the principal borrower. Unfortunately, this has an impact on the guarantor’s loan eligibility. For example, if the borrower takes an ₹80 Lakh home equity loan, the guarantor’s eligibility is reduced by ₹80 Lakhs. Not only that, but any failure directly impacts the credit score of the guarantor.
5. You are obligated until the loan term expires
It is important to remember that the guarantor is responsible for the loan until the loan term expires. If a loan is foreclosed prematurely, the guarantor gets an NOC from the loan provider. This is to ensure the creditor has notified the credit scoring companies of the release of the guarantors. As a result, the guarantor can obtain a bigger loan amount.
6. Before signing, carefully read the terms
A guarantor should only sign loan documents after thoroughly reading and comprehending the policies and terms. If you are still looking for loan terms, take a step back and consider online Personal Loan.
7. Guarantor Substitute
Individuals can find a replacement and approach the provider if they want to avoid being a guarantor. You will be relieved if the loan provider is satisfied with the qualifications of the substitute guarantor.
8. Seek legal advice
Your relationship with the borrower may deteriorate over time due to default repayments. To avoid such difficult situations, you could seek legal counsel from a lawyer if you pledged your assets as collateral.
If someone asks you to be a guarantor for a loan, do not come under any personal obligation, take your time before taking a call. However, it is prudent to understand the terms, conditions, and responsibilities before agreeing to be a guarantor. It’s best to be in the same city as the loan applicant, especially when it comes to unsecured loans. For instance, if you live in Bangalore, and so does the applicant who is looking to apply for unsecured loans in Bangalore, only then should you partake in the loan as a co-applicant.