It is a little difficult to say no to your close relative or friend when they ask you to be their loan guarantor. Loan guarantors are not co-borrowers but guarantors who formally assure the bank or lending institutions that the borrower will repay the loan amount on time, abiding by the rules. The credit worthiness of a person allows one to be a loan guarantor, but it does not mean that the borrower's creditworthiness is being questioned, often it is a formality that needs to be followed as a part of Credit Risk Management in Banks, in case of a massive amount. It might be a risk at times as you can never be too sure of somebody's credit behaviour which is why always think before you say a yes and ensure nothing is at stake.
Below are a few questions that we will answer to help you decide if you want to be somebody's loan guarantor or not:
When should you say a Yes?
As we said, becoming somebody's loan guarantor depends on one's own discretion. One thing you should never forget to consider is the borrower's financial ability and capacity to repay the loan.
When should you say a No?
If you come to understand that the bank wants you to be a guarantor because they do not trust the borrower's financial capabilities, then take a closer look at the borrower's papers and credit history to avoid any financial distress on you.
Will your credit score be affected?
Credit Score plays a very crucial role when it comes to any kind of financial activity, even when you become a loan guarantor. While the borrower is expected to have the required credit score needed for personal loan, as a guarantor, your credit score is also at stake. Your credit score will be affected when there is a delay in paying the EMIs or any kind of default. The ratio in which your score is affected is influenced by the latest credit scoring model followed by the respective credit bureau. Before becoming a guarantor make sure your credit score is strong enough to take a hit if there is any irregularity in the repayment of the loan by the borrower.
Will your eligibility for loan get affected?
Becoming loan guarantor means you've increased your liability too. The lenders will then limit your loan amount or not give you a loan at all, so if you are sure that you wouldn't need to take a loan soon then say a yes to becoming a guarantor.
What will be the tenure of the loan?
Becoming a loan guarantor means you are tied to a loan till the time it is fully paid back, which also means it will be a liability. Make sure the loan tenure is not too long to avoid being deprived of any financial assistance you may need in the future.
What are the legal actions that can be taken by the bank against you?
You may have to pay the amount if the borrower goes absconding irrespective of the fact that you are not the co-borrower there will be legal actions taken against you too. It is mandatory to read and check every document that you sign while you become the guarantor.
Once you become a loan guarantor, it is not easy to withdraw. Keeping that in mind we have answered most of the questions that might come in your mind while agreeing to become the loan guarantor, making sure you take a decision after understanding every term and condition and it does not affect your finances negatively
