A guarantor loan is something, in which the loan guarantor is liable to pay the loaned amount, in case of any default done by the primary applicant. If the applicant is not able to repay the loan, then the loan guarantor has to do that. And it is totally unlike the case of a co-borrower, according to which the secondary borrower has to be of the same family as the primary borrower, but a guarantor doesn’t need to be any close family member or relative. Anyway, when you sign as a loan guarantor, you shall not only be liable to pay the amount off in case of any issues, but your own borrowing capacity shall dwindle along with your credit score. It will happen in tandem with the primary applicants’ defaults.
When do financial institutions ask for a guarantor on a loan?
Most of the banks or financial institutions ask for a borrower to provide for a guarantor on a loan in the following scenarios,
• The applicant has a really bad credit history and an extremely low credit score
• The applicant doesn’t fall in the age limit
• The profession of the applicant is very risky
• The income of the primary applicant is not what the institute demands
• And at times it will just be a part of the policy
These are just a few reasons based on which a bank or financial institution will decide for a loan guarantor or a guarantee for loan repayment by the primary individual who fills the application. And this is applicable across various kinds of loans, including, education loan, home loan, Best personal loan, etc.
How being a loan guarantor may impact your finances?
As soon as you sign as a guarantor for a loan with any financial institution, a few implications will certainly follow, which are,
• Taking legal responsibility of the loan. Though it is not at all same of being a loan guarantor and being a co-borrower of loan from a bank or financial institution, but from the lending organisation’s perspective, you both are entrusted to pay the loaned amount back legally.
Therefore, when you sign as a guarantor, you have to submit all relevant documents to the lender, which may include your income proof, your information of assets and liabilities etc. And then your eligibility is judged based on the documents you provided them with. Simply, the bank or institution will check the fact that if you will be able to pay the amount back in case of any default.
• It might potentially impact your credit history. On signing up as a guarantor of a loan, it will start showing on your credit report, and that in turn will affect your credit history, in case the primary applicant has a default. And thereby, your eligibility to receive new loans when you might need them might decrease as your credit history will already dwindle.
• The personal assets, which you need to keep as collateral might also suffer impact in case of any default by the primary applicant. So, firstly the institution will begin with the borrower’s asset, and then reach you to pay the extra money or the outstanding amount. In case you are unable to do so, your personal assets shall be liquidated to recover the remaining balance.