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Everything You Need to Know About Guarantors In Personal Loans

Everything You Need to Know About Guarantors In Personal Loans

A personal loan is easily available these days. It is an unsecured loan where one doesn’t have to put up any collateral as security. Nowadays, many banks and financial institutions offer pre-approved personal loans to customers with good credit scores. However, some loans cannot be approved unless a guarantor vouches for the applicant’s repayment capacity.

What does a personal loan with a guarantor mean?

In a personal loan, a guarantor means a person who proves the authenticity of the borrower. Such a person acts as a witness and provides an assurance of the borrower’s credibility to the lender. The guarantor takes a guarantee on behalf of the borrower to repay the loan with interest if the latter defaults in repayment. In such a scenario, the guarantor is legally bound and liable to repay the loan.

Types of loan guarantors

When it comes to finding a personal loan with a guarantor, borrowers may rely on different kinds of guarantors:

1. Personal guarantor: A friend or family member who steps in if the borrower cannot repay. This is common for personal, education, or small-business loans.

2. Corporate guarantor: A company that supports the borrower’s application, usually for larger business or commercial loans where added financial strength helps.

3. Self-guarantor: A borrower who secures the loan with their own assets, allowing them to avoid involving anyone else. This works for people with solid credit and adequate resources.

4. Government guarantor: Public agencies that back loans through dedicated schemes, making credit more accessible for students, entrepreneurs, and underserved groups.

Also, read – Home Loan Guarantor Guide: Things to Know

Eligibility criteria for a loan guarantor

The eligibility criteria for a loan co-guarantor will vary by financial institution or lender. In most cases, co-guarantor requirements must fit the following criteria:

1. They must be of legal age

2. They must have a stable monthly income. For example, the income for your guarantor must meet a certain minimum every month.

3. They must have a sufficient credit score and a good credit history. Remember to check the CIBIL score for your guarantor to confirm eligibility.

In most cases, co-guarantors for personal loans are friends, family members, spouses, or colleagues. If you require a loan with a guarantor, reach out to Tata Capital’s experts for more information on guarantor eligibility! 

Also, read – What Are The Risks Of Being A Personal Loan Guarantor

Differences between a guarantor and a co-signer

When taking on personal or other types of loans, you may be confused about the difference between a guarantor, a co-applicant or a cosigner. Below, we break down the difference between a guarantor vs. co-signer:

– A co-signer is someone who takes on full legal responsibility for a borrower’s debt. If the borrower misses payments or falls behind, the co-signer is immediately on the hook to step in and make things right.

– A guarantor plays a similar role, but with one key difference: they’re only required to step in if the borrower completely defaults. Essentially, they are a last resort.

While a guarantor isn’t required for personal loans, it can increase chances of approval. It is critical to do your research before signing on as a co-signer vs. a guarantor for personal loans.

Why do financial institutions offer personal loans with guarantors only?

By offering a personal loan with a guarantor, the lender feels more assured about the repayment of the loan.

Here are a few situations when a lender may be compelled to ask for a guarantor:

  • If the borrower is not financially secure enough to repay the loan.
  • If the borrower doesn’t have a stable job and keeps changing jobs frequently.
  • If the borrower’s credit score is not good enough to get a personal loan.
  • If the loan amount is beyond a certain limit.
  • If the lender is not convinced or confident that the borrower will repay the loan.
  • If the borrower already has a number of outstanding loans.
  • In some exceptional cases, a guarantor may be required as it is in accordance with the rules and regulations of the financial institution.

Also, read – Should You Be a Personal Loan Guarantor for your Sibling or Friend?

Responsibilities of a guarantor for a personal loan

Before becoming a guarantor, a person should understand the implications it may have. On becoming a guarantor, the person will become equally liable as the borrower. In the case of a default in payment by the borrower, the lender (bank or financial institution from where the loan was taken) can recover the amount from the guarantor. In such circumstances, the lender can also take legal action against the borrower as well as the guarantor.

The guarantor’s monthly income and other assets can also be attached to recover an outstanding loan. This is why most banks have guidelines about guarantors; for example, the guarantor should be in a better financial position than the borrower.

On the positive side, if the borrower repays on time, the guarantor’s credit score also increases. However, if the borrower defaults in repayment, the guarantor’s credit score will take a hit, even if the guarantor repays the other loans on time. On becoming a guarantor, an individual’s credit limit is also reduced.

Things to keep in mind before becoming a guarantor

Here are a few tips that an individual must follow before becoming a guarantor:

  • Ensure that the primary borrower is trustworthy.
  • Check whether the borrower will be able to repay the loan on time.
  • If the guarantor is planning on making a big investment for which they might need a loan in the near future, they should reconsider being a guarantor. Guarantor personal loans impact the guarantor’s credit score as well, which might negatively impact their ability to get other loans in the future.
  • Know why the primary borrower is applying for a loan and assess the risk involved.
  • Ask for a co-guarantor. This way, in case of default in repayment, the entire financial burden will not fall on one guarantor.
  • Read the loan agreement thoroughly and understand it. The guarantor should know what the implications will be if the borrower is critically ill or no more in the future to be financially prepared in such scenarios.
  • Keep checking with the borrower about the progress of their repayment.

Also, read – The Role of Co-Applicant in Enhancing Education Loan Eligibility

Last words of advice

Before signing the loan agreement of a guarantor personal loan, the guarantor should chalk out their contingency plan in case the primary borrower is unable to repay the loan and the burden of repayment falls on the guarantor. Before agreeing to be a guarantor, one should consider factors like the creditworthiness of the primary borrower, their own short-term or long-term financial goals, the borrower’s repayment capacity, the amount of loan etc.

Additionally, the guarantor may take precautionary measures by asking the borrower to invest in loan insurance. This will protect the guarantor in case the borrower fails to repay the loan. If you are looking for a personal loan, consider getting an instant personal loan. Benefit from the low processing fees, simple paperwork, and easy disbursement.

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FAQs

What is a personal loan with guarantor?

A personal loan with a guarantor means you’ve borrowed money with someone else—an individual or even a business—who agrees to step in and repay the loan if you’re unable to meet the repayment terms.

Who can be a guarantor for a personal loan?

Typically, a person must have a stable monthly income, a good credit score with a clean credit history, and be an Indian citizen of legal age. However, the exact eligibility requirements may vary by lending institution.

What are the requirements for a personal loan guarantor?

Personal loan guarantor requirements vary by lender or financial institution. In most cases, one must be an Indian Citizen, be above the age of 18, have a stable monthly income, and have a good credit history and CIBIL score.

What are the risks of being a guarantor for a personal loan?

Some risks of being a guarantor for a personal loan include becoming financially responsible for the loan amount if the borrower defaults. Any missed or defaulted payments by the primary borrower can also negatively impact the guarantor’s credit score and overall credit history.

How does a guarantor affect my personal loan application?

If you are a guarantor on someone’s loan, this may reduce the loan amount you’re eligible for in the future. This is because lenders consider the guaranteed loan as part of your potential financial responsibility.

Can a guarantor be removed from a personal loan?

In most cases, it is extremely difficult to remove a guarantor from a personal loan. This can generally only be done if the borrower is able to find a new guarantor or pledge some other collateral.

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