If you find yourself in a financial slump, you may consider turning to your loved ones for assistance. However, financial matters can turn relationships sour, especially if there’s no written agreement. Similarly, you might have faced a situation where your sibling or friend asked you to be a personal loan guarantor. If yes, read on to learn everything you need to know about becoming a guarantor.
Who is a loan guarantor?
As a loan guarantor, you take the guarantee that the borrower will repay the dues on time. Hence, you are legally liable for any default made by the borrower and act as an assurance for the lender.
For instance, if your friend applies for a personal loan for education and asks you to become the guarantor, you will have to repay the amount if they default.
Also, lenders have different policies regarding guarantors. Here are a few circumstances where lenders demand a guarantor:
- When the loan amount is beyond a certain limit
- When the borrower lacks a stable source of income
- When the borrower doesn’t have a good credit score
- When the borrower doesn’t have a stable domicile history and frequently relocates
Additional Read: How to Choose the Best Personal Loan for Needs?
Should you become a personal finance guarantor?
Firstly, you must understand the risks of becoming a guarantor. You can start by examining the borrower’s purpose of borrowing, loan amount, and creditworthiness before agreeing. Here’s how this decision can affect you:
#1 Credit history
First off, becoming a loan guarantor can affect your credit history. If the borrower defaults on the loan for any reason, it will reflect in your credit report and lower your creditworthiness when you approach a lender.
In this way, regardless of whether you have a healthy financial history and make your credit card bill or EMI payments on time, it negatively impacts your personal loan eligibility.
On the contrary, if the borrower repays the loan on time, your credit rating will increase as the guarantor.
#2 Future loan prospects
Since your loan eligibility can get affected if the borrower defaults, you might lose out on favourable terms and more attractive personal loan interest rates when applying for a loan.
Therefore, if you plan on taking a loan in the future, becoming a loan guarantor for your friend or sibling might not be a good idea if you’re unsure of their repayment capacity. Similarly, if you’re confident of their creditworthiness and become a loan guarantor where they repay the loan on time, your chances of getting a competitive loan deal will increase.
Over to you
In a nutshell, if you aren’t confident about the borrower’s creditworthiness, it’s better to decline the offer of becoming a guarantor. Also, if you agree to take on the role of a guarantor, make sure it is for a loved one whose repayment capability you can count on. Finally, if you require personal credit for a financial obligation, head to Tata Capital’s website to check out our loan offerings. You can use our personal loan EMI calculator to plan your repayment and avail of easy-to-fulfil loan eligibility and affordable interest rates.