Q. Hello! I am in a dilemma. A distant relative of mine is facing a financial emergency and has approached a bank for a personal loan. His bank has asked for a loan guarantor. He wants me to be the guarantor for his loan. While I know about his financial status and the purpose of the loan, I am not sure if I should give my approval to be his loan guarantor? Can you please guide me about what it means to be a personal loan guarantor?
Ans. Your concerns are valid, Ramanuj. Becoming a loan guarantor for a friend or a relative is a tricky decision. So it is important to consider all the aspects, including the risks involved before you go ahead.
Who Is A Personal Loan Guarantor?
A loan guarantor is that individual who gives the guarantee to the lender that the borrower will pay the loan. And if the borrower fails to do so, the loan guarantor becomes liable for repayment of the outstanding loan amount.
Why Is A Loan Guarantor Needed?
A personal loan is an unsecured loan, which simply means that a borrower is not required to submit any collateral. Getting a personal loan is convenient, but sometimes the lender may ask for a loan guarantor to be assured that the money they have lent will be duly repaid.
A lender will ask for a personal loan guarantor if the borrower’s credit score is low or the lender has apprehensions about borrower’s income stability or repayment capacity. It can also ask for a guarantor if the borrower is borrowing more than the amount he is eligible for. You should check with your relative about the reason he needs a guarantor.
How To Check If You Are Eligible To Be A Persona Loan Guarantor?
You should be aware that not everyone can become a loan guarantor. The terms and conditions for a loan guarantor vary from bank to bank. Normally, lenders prefer those individuals as loan guarantors who have a steady income. They would also consider your credit history along with your repayment capacity. So, before you agree to be a loan guarantor, check whether you are eligible to be one.
The Dilemma – Should You Become A Loan Guarantor?
The dilemma to help your relative come out of this financial crisis is understandable. On one hand you want to be a Good Samaritan, on the other, you do not want to land up in any kind of financial mess in the future. You should remember that as a loan guarantor, you will be liable to repay the loan if your relative defaults. In case you fail to repay the loan, it will have a repercussion on your credit score, which will affect your future ability to take a loan for your needs.
What Are Your Choices?
To be on the safer side, you can check your relative’s credit report to know about his/her repayment ability. If the lender allows, discuss with your relative the possibility of having multiple loan guarantors to reduce the default risks. You can also discuss with your relative to consider other financing facilities, including secured ones, to meet his requirements. This might be a slightly difficult decision but if you’re not confident about your relative’s finances or feel this might be too risky, you may want to let him/her know about it so that he/she can look for another guarantor or explore other ways to raise cash.
Have a question on personal finance? Ping me on Twitter at @adhilshetty with the hashtag #AskAdhil. The writer is CEO, BankBazaar.com, an online marketplace for loans and credit cards. Need help in calculating your EMI? Use BankBazaar’s easy Personal Loan EMI calculator.