If you are a loan guarantor, your liability will increase and credit eligibility will go down-- So before sign in any guarantee paper think two times

 Don’t let your emotions get the best of you

To be honest, the reason why most people opt for Personal Loans, more than any other source of financing, is because they are unsecured loans. Meaning, unlike other loans, personal loans do not require you to put up a collateral.

However, some banks and other financial assistance institutions might ask you for a guarantor before accepting your loan application. So, if you’re planning on becoming a guarantor its better you read this article before letting your emotions get the best of you.

What Is a Guarantor?

A guarantor is a financial term describing an individual who promises to pay a borrower's debt in the event that the borrower defaults on his or her loan obligation. Guarantors pledge their own assets as collateral against the loans. On rare occasions, individuals act as their own guarantors, by pledging their own assets against the loan. The term "guarantor" is often interchanged with the term "surety."

KEY TAKEAWAYS

• A guarantor guarantees to pay a borrower's debt in the event that the borrower defaults on a loan obligation.
• The guarantor guarantees a loan by pledging his or her assets as collateral.
• A guarantor alternatively describes someone who verifies the identity of an individual attempting to land a job or secure a passport.
• Unlike a co-signer, a guarantor has no claim to the asset purchased by the borrower.

The moment you sign up as a guarantor, your own loan eligibility will come down. In case you apply for a loan, lenders will consider the outstanding amount on the loan for which you are a guarantor as your contingent liability and may extend credit to you accordingly.

“Guaranteeing a loan will reduce the overall loan eligibility of a loan guarantor by the outstanding loan amount of the guaranteed loan. So, one should always factor in his own credit requirements before agreeing to become a loan guarantor," added Aggarwal.

Besides, the fact that you are a guarantor to a loan will also figure in your credit report. This also means that any default, either by the primary borrower or you, will affect your credit score.

Understanding the Role of a Guarantor

A guarantor is typically over the age of 18 and resides in the country where the payment agreement occurs. Guarantors generally exhibit exemplary credit histories and sufficient income to cover the loan payments if and when the borrower defaults, at which time the guarantor's assets may be seized by the lender. And if the borrower chronically makes payments late, the guarantor may be on the hook for additional interest owed or penalty costs.

Guarantors as Certifiers

In addition to pledging their assets as collateral against loans, guarantors may also help individuals land jobs and secure passport documents. In these situations, guarantors certify that they personally know the applicants and corroborate their identities by confirming photo IDs.

Limited Versus Unlimited

As defined under the terms of the loan agreement, a guarantor can either be limited or unlimited, with respect to timetables and levels of financial involvement. Case in point: a limited guarantor may be asked to guarantee a loan only up to a certain time, after which the borrower alone assumes responsibility for the remaining payments and alone suffers the consequences of defaulting. A limited guarantor may also only be responsible for backing a certain percentage of the loan, referred to as a penal sum. This differs from unlimited guarantors, who are liable for the entire amount of the loan throughout the entire duration of the contract.

Other Contexts for Guarantors

Guarantors aren't solely used by borrowers with a poor credit histories. Pointedly: landlords frequently require first-time property renters to provide lease guarantors. This commonly occurs with college students whose parents assume the role of the guarantor, in case the tenant is unable to make the rent or prematurely breaks the lease agreement.

Guarantors Versus Co-Signers

A guarantor differs from a co-signer, who co-owns the asset, and whose name appears on titles. Co-signer arrangements typically occur when the borrower’s qualifying income is less than the figure stipulated in the lender's requirement. This differs from guarantors, who step in only when borrowers have sufficient income, but are thwarted by lousy credit histories. Co-signers share ownership of an asset, while guarantors have no claim to the asset purchased by the borrower.

However, in the event the borrower has a claim against a 3rd party that has caused the default, the guarantor has the right to invoke a process called "subrogation" ("step into the shoes of the borrower") in order to recover damages.

WHO IS A PERSONAL LOAN GUARANTOR?

When a person applies for a Personal Loan, many banks ask for a guarantor. He/she is not only a witness or someone who proves the authenticity of the borrower, but is also someone who guarantees that the borrower will repay the loan. And in case the borrower doesn’t, the guarantor becomes liable to cover up for the defaults.

WHY DO BANKS ASK FOR A GUARANTOR?

Asking for a guarantor is the bank’s way of ensuring that the money they have lent is safe and secure, and will be duly repaid.

SITUATIONS UNDER WHICH A BANK ASKS 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

Additionally, there might be other reasons as well. For example, the requirement of a guarantor may be a part of the lending party’s rules and regulations.
PS: Not everybody can become a guarantor for a Personal Loan. There are almost always certain norms specified by financial institutions which a guarantor must meet.

WHAT HAPPENS WHEN THE BORROWER DOES NOT REPAY THE PERSONAL LOAN?

It is quite understandable that you would want to help out a friend or a family member in their time of need. But, it is also equally important to understand the repercussions of the worst case scenario i.e them not being able to repay back the Personal Loan they have taken.

When you sign up as a Guarantor to their Personal Loan, you become liable for the loan as the principal borrower. Which is basically you giving consent to the bank that you’ll be financially backing the borrower in case they default.

What follows next are a series of events that don’t look well for the Guarantor-

• Banks usually 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 in turn reflects poorly on the credit rating of the Guarantor which then hampers his or her ability to get a loan easily in the future.

The decision to become a Guarantor is yours, and yours only. But, it is pertinent that you be aware of all that is involved in doing so. The Pros and the Cons.