Many lenders ask for a loan guarantor when unsure about the borrower’s eligibility or repayment capacity. So, whether one should become a loan guarantor or not?
There are certainly many risks involved when one becomes a personal loan guarantor.
Let us look at the risks that may arise if one becomes a personal loan guarantor:
Liability of repayment of a loan
The biggest risk in becoming a loan guarantor is the loan repayment risk. Yes, if the primary borrower defaults on the loan repayment, the loan guarantor will be treated as a defaulter and must repay the loan on time.
The loan provider can ask the loan guarantor for timely repayment of the outstanding loan. The lender may also ask for the interest, penalty, and other charges. So, if you are planning to become a loan guarantor, you should ensure that the borrower gets some loan protection insurance plans.
This will reduce the overall liability in case of non-payment on behalf of the borrower.
Effect on getting a loan in future
Another risk of becoming an unsecured loan guarantor is that it impacts your future loan eligibility. The amount of outstanding guaranteed loan reduces your loan eligibility, as this outstanding amount is considered a contingent liability for the loan guarantor.
The important thing to note here is that you cannot escape from the responsibility of a loan guarantor until the borrower finds a new, compatible guarantor.
So, if you are planning to take a loan or have plans to take a loan in the future, it is better to refrain from becoming a loan guarantor.
Impact on credit history
Any default or delay in the loan you have guaranteed will directly affect the loan guarantor’s credit score. It adversely affects the credit score of the guarantor.
As loan guarantors, they should also keep a close watch on the repayments of the loans they have guaranteed. They should see their credit report at regular intervals to ensure no defaults or late payments in the loan repayment history.
Therefore, the loan guarantor should check the financial stability and history of the borrower before agreeing to become a loan guarantor.
Uncertainty and risk of things going wrong
Before becoming a loan guarantor, one check for the financial stability, discipline, credit history, etc., of the borrower. But even if all these parameters are right, certain risks are not in the control of the borrower or the guarantor.
Risks like a business not doing good, recession, war, natural calamity, etc., are always there. These risks increase the chances of default or delayed payment of the guaranteed loan. And situations like these are unfavourable for loan guarantors, as they are also treated as a party in default.
One should not become a loan guarantor unless the borrower is one’s child or spouse. It will mean saying no to your friends and family. It might seem harsh, but not owning such a big financial liability is the right way.
Still, there might be some circumstances where you have no choice but to become a loan guarantor; then, in that case, you should do your due diligence and check the financial history of the borrower before agreeing. If you feel that there are risks involved, decline the offer.