Being a loan guarantor for your friend or family members could be a generous move, however any default or skip can put you in a tight financial spot.
Let’s take a look at the financial responsibilities of a loan guarantor. By accepting to be a guarantor for a loan, you are assuring the lender of on-time repayment in case the borrower or co-borrower fails to do so, either due to substantial or non-substantial reasons.
Essentially, whenever, wherever the borrower fails, the guarantor will make up for him not only by paying up, but also the default will show upfront on the guarantors credit report. This may negatively impact the credit score & creditworthiness. Therefore, before becoming a loan guarantor, you should take the following pointers into consideration.
- Consider the creditworthiness of the borrower– Even when you thoroughly trust the borrower, you should still check the creditworthiness before arriving at a decision. If it looks that the borrower can easily repay the loan, then happily go ahead to be a guarantor.
- Rethink your actions– If you may soon need a loan for yourself, then it’s important to rethink your decision and save your financials for the next borrowing. Every lender will consider your status as a guarantor while evaluating your credit score and eligibility to take a personal loan.
- Understand why the borrower needs a guarantor– This provides an insight into the credit history and track record of the borrower. So, if its poor, then you’ll have to reconsider your thought of lending your guarantee services.
- Build a contingency plan– In case, the borrower fails to pay then the loan repayment falls upon you. So ensure, you’re quite self-reliant to meet financial ends. Be extra careful before taking on this responsibility at peril. Building an emergency fund will help prepare for the worst so that you can support your friend and relative.
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Gauge the impact on the Guarantor’s Credit Score
There’s absolutely no doubt that becoming a guarantor has many financial consequences on your credit standing. And if at all the principal borrower defaults on the loan in inadvertently, then the legal onus will fall on the guarantor completely. This is true even when all your other payments are made on time, your credit score stands impacted. And this will in turn deter your eligibility chances for quick & easy loans as and when required. Your grilling credit information bureau will like to access all credit transactions of the guarantor as well before proposing a loan.
We aren’t advocating an idea against the guarantor concept, however we urge our readers to stay alert! Take this as an advantage to help your close ones to reach a financially prudent decision & save all financial troubles. All the pointers mentioned above can successfully promote a guarantor however keep gentle reminders on to inform your borrower about the dues. If things are chalked out properly then expect this theory to work perfectly for you. Divert all your attention towards the terms and conditions once you’re signed up. This is a preliminary step to control unnecessary legal & financial costs. To say the least, educate the borrower to conduct top-notch research before opting for a particular loan offering in the market.
