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Mar 5

Important Factors to Consider before you Become a Loan Guarantor

Getting a loan approved is a tough task in itself what with all the paperwork and formalities to be completed. And then there are some loans where the bank or the financial institutions expect the borrower to bring in a guarantor. Most often than not people sought help from a close friend or relative in such cases.

So, if you too are approached with such a request, don’t jump your guns and sign any papers. Here are some important factors to consider before becoming a loan guarantor.

  1. The Factor of Trust:

Being a friend or an acquaintance is easy. But when a financial angle comes into play, you need to be doubly sure. Before you go ahead and become a loan guarantor to a person, take some time and think if you really can trust the person to pay the loan on time. Unless you are sure of the person and his intentions, do not offer to be a guarantor.


  1. Guarantor Type:

There are actually two types of loan guarantors that banks offering loans seek. First is the non-financial guarantor whose details are requested just for the purpose of a secondary contact for the borrower. This is a safe bet and one that you can go ahead with. The other is the financial guarantor. In such a scenario, the bank considers your financial details before offering the loan to the primary borrower. This is a risky call and one that should be taken with a lot of care.


  1. Guarantor Obligations:

Based on the type of guarantor that you are offering to be, you will be expected to complete certain obligations. It could be anything from paying the late fee or to paying the additional interest, in case the borrower fails to make the payment on time. Make sure that you are well aware of these obligations before you consider becoming a loan guarantor.


  1. Your Personal Finances:

In case, someone has asked you to stand in as a financial guarantor, you need to keep one thing in mind. In case, the borrower fails to pay the loan installments, you would be obliged to make the payments. So, before you get into any such transaction, analyze your personal finances. Find out if you are really in a position to take such a risk or whether you would be able to make the payments on the borrower’s behalf.


  1. The Borrower’s Finances:

Are you well aware of the financial condition of the borrower? Is the borrower open enough of his/her finances with you? Unless you are sure of the person’s financial condition and unless the person gives you a clear picture of the current financial state, don’t sign in as a guarantor for the person.


  1. Effect on Loan Eligibility:

Believe it or not but signing up as a loan guarantor is quite similar to being a borrower. Of course, you would not have to pay the monthly installments and the interest. But your loan eligibility will be compromised just the same. Thus, your credit score will surely be affected once you sign up as a loan guarantor. So, find out how your loan eligibility might get affected before you consider becoming a loan guarantor.


  1. Loan Tenure:

The one thing that you need to keep in mind before agreeing to be a loan guarantor is that you will be answerable for it till the time the borrower pays off the loan. Find out the tenure for which the borrower is planning to take the loan. Think if you are ready to take up such an obligation for the given period of time.


Being a loan guarantor is easy but the repercussions in case of a default on the part of the primary borrower can be quite serious. It can not only scar your credit score but also put your personal finances in jeopardy. Thus, take your time to consider all the important factors before you go ahead and sign in as a loan guarantor for anyone.

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