Everything You Need to Know About Guarantors in Personal Loans

When applying for a personal loan, most people focus on the borrower's requirements, eligibility, and repayment ability. However, some lenders also require a guarantor to approve the loan.

If you've come across the term and wondered, "Who is a guarantor?" or "What role does a guarantor play in personal loans?" – this blog will answer all your questions.

Understanding the concept of a guarantor in personal loans is essential, as it involves significant responsibilities and risks.

Here's a detailed guide on everything you need to know about guarantors in personal loans in India.

Who is a Guarantor?

A guarantor is an individual who agrees to take responsibility for repaying a loan if the primary borrower fails to do so.

In other words, they guarantee to the lender that the loan amount will be repaid even if the borrower defaults.

The guarantor's role adds a layer of security for the lender, especially when the borrower's credit profile doesn't meet the required standards or the loan amount is high.

Guarantors are usually close family members, friends, or colleagues of the borrower who trust the borrower's financial capability to repay the loan.

Why Do Lenders Require a Guarantor?

Lenders might require a guarantor for personal loans under certain conditions, such as:

1. Low Credit Score of the Borrower: If the borrower's credit score is below the acceptable threshold, a guarantor's assurance may be necessary to approve the loan.
2. High Loan Amount: Lenders might require a guarantor for a substantial loan amount to mitigate the risk of default.
3. Insufficient Income: If the borrower's income is deemed insufficient to meet the repayment obligations, a guarantor with a stable financial background can provide additional security.
4. Limited Credit History: Borrowers with limited or no credit history may need a guarantor to verify their repayment ability.

Responsibilities of a Guarantor

Being a guarantor for a personal loan is a serious commitment. Here are the key responsibilities involved:

1. Repayment Obligation: If the borrower fails to repay the loan, the guarantor is legally obligated to repay the outstanding amount, including interest and penalties.
2. Credit Impact: If the borrower defaults or delays repayments, the guarantor's credit score can be affected. Additionally, the guarantor's credit report will reflect the loan details.
3. Financial Scrutiny: Lenders assess the guarantor's financial stability, income, and creditworthiness before approving the loan. This can involve submitting income proofs, bank statements, and other financial documents.
4. Legal Accountability: In case of a default, the lender has the right to take legal action against the guarantor to recover the loan amount.

Factors to Consider Before Becoming a Guarantor

If you've been asked to be a guarantor for a personal loan, it's important to carefully evaluate the situation. Here are some key factors to consider:

1. Be fully aware of the financial and legal responsibilities of being a guarantor.
2. Consider the borrower's financial stability, repayment history, and purpose of the loan before agreeing.
3. Keep in mind that being a guarantor may limit your ability to take loans for yourself, as the guarantor obligation is considered a liability.
4. Ensure you have a copy of the loan agreement and fully understand the terms and conditions, including the repayment schedule and penalties for default.
5. If you're unsure about the implications, seek advice from a financial expert before deciding.

Can a Guarantor Refuse to Pay?

Legally, a guarantor cannot refuse to pay if the borrower defaults. The guarantor accepts full responsibility for the loan repayment by signing the agreement. However, a guarantor can take certain steps:

1. Negotiate the repayment options with the borrower to avoid default.
2. Approach and request the lender to restructure or extend the loan repayment period and ease the financial burden.
3. If the borrower defaults and the guarantor cannot pay, consulting a legal professional may help explore potential solutions.

How Does Being a Guarantor Affect Credit Score?

Being a guarantor for a personal loan can impact your credit score in the following ways:

1. The guarantor's credit report will include the loan details, increasing their overall liability.
2. If the borrower misses payments or defaults, it negatively affects the guarantor's credit score as well.
3. The guarantor's debt-to-income ratio may increase, making it harder to qualify for loans in the future.

Also Read: Difference Between CIBIL Score and CIBIL Report

Can You Remove Yourself as a Guarantor?

In most cases, removing yourself as a guarantor is not easy and depends on the lender's policies. Here are a few scenarios where it might be possible:

1. Suppose the borrower repays a significant portion of the loan. In that case, the lender might agree to release the guarantor from their obligations.
2. The borrower can provide another guarantor to replace the existing one, subject to the lender's approval.
3. In rare cases, legal action might be required to challenge the guarantor agreement if it was signed under duress or misinformation.

Precautions Before Agreeing to Be a Guarantor

To protect yourself, take these precautions before agreeing to be a guarantor for a personal loan:

1. Ensure the borrower has a steady income and a solid repayment plan.
2. Clarify your responsibilities with the lender and review the loan terms in detail.
3. Discuss repayment terms and consequences with the borrower to avoid misunderstandings.
4. Keep copies of all loan-related documents for future reference.

Conclusion

Guarantors play a critical role in personal loans by assuring lenders. While it can be a helpful gesture for someone in need, it's essential to understand the financial and legal implications before becoming a guarantor. Whether you're considering asking someone to be a guarantor or agreeing to become one, evaluate all factors, risks, and responsibilities thoroughly.