Being a guarantor means helping someone looking for a credit facility, but banks are not assured of their financial potential. Becoming a guarantor for someone means you sign the agreement and officially announce that you will afford the repayment if the borrower fails to repay it on time.
That's why you will find parents as the first guarantor for any education loan, personal loan, or other credit facilities.
In short, a guarantor is anyone who proves the authenticity of the borrower and becomes a witness when borrowing a loan amount. If the borrower fails to make the payment on time, the guarantor is liable to do the same.
That's why every guarantor must learn about being a guarantor before signing the document.
As mentioned earlier, there are specific scenarios when banks/lenders ask for a guarantor. Below are scenarios where you must bring a guarantor to approve your loan request.
Note that these are a few of the multiple reasons behind requesting a guarantor.
It's crucial to note that not everyone can become a guarantor. Some banks have specific preferences for guarantors.
Steady Income Source: Banks and lenders usually consider any individual with a regular income source a guarantor. This becomes easy for the banks/lenders to recover money if the borrower defaults on the loan amount.
High Credit Score: Another factor that some lenders/banks consider for a guarantor is an individual with a good credit profile.
Working in the Same Organization: Some lenders also prefer that the guarantor and borrower must work in the same organization.
Home Owner: It is a distinct advantage if the guarantor is a home owne
Apart from these bank-specific requirements, there are a few general requirements that you must know before becoming a guarantor:
Before the guarantor signs the agreement, the lender/bank must explain the rights and responsibilities alongside the legal terms. Moreover, the lender must also provide a copy of the loan agreement after loan approval.
Let's understand this term with an example!
Rohan is a working professional in a renowned MNC. He is currently earning Rs 20 lakh annually. Once his brother applied for a loan for home renovation. As the bank requested a guarantor, he approached Rohan to become his guarantor. Rohan agreed without a second thought as this was a matter for his brother.
Unfortunately, Rohan received a call two years later demanding him to pay the outstanding amount his brother had skipped for the last few months. When you sign the agreement as a guarantor, you give the authority to the bank to reach you in case the borrower skipped repaying their EMI on time.
Banks often wait a few months before approaching the guarantor to take responsibility for the overdue amount. If the guarantor fails to take responsibility for the outstanding loan amount, he might be threatened or even considered a 'willful defaulter.'
The simple answer is YES! Anyone can be a guarantor who trusts the borrower and takes responsibility for settling the dues if the borrower fails to do so. Often parents or spouses become the guarantor. However, sometimes, friends and relatives can also sign as a guarantor.
However, the guarantor must meet the basic criteria to qualify as a guarantor. If you are requested to become a guarantor, it's crucial to ask a few questions yourself.
You will be amazed to know that anyone can be a guarantor for the borrower. You should always help anyone in you know who has a low credit score. Nowadays, guarantors are needed for various types of loans like personal loans, mortgage loans, rental agreements, etc. So, below are the reasons when you should take a step forward to become a guarantor and help your known.
In either case, the borrower isn't willingly facing this situation. So, you should help them and let them build a strong credit score with time. You should encourage them to repay the EMI on time to eliminate penalties and strengthen their credit rating.
If you are planning to become a guarantor, you must know the obligations as a guarantor. Below is the knowledge you must know before becoming a guarantor.
Thorough Research Before Signing: Before signing the agreement as a guarantor, you should read every document thoroughly and ensure it fits your criteria. You are liable to know everything related to the loan. You should also ensure the lender doesn't hide any T&C.
Duration of Being a Guarantor: You must be willing to be the guarantor for the entire loan duration.
Ask for Documents Copy: As a guarantor, you can get a copy of the loan documents from the lender. This agreement should specify:
The process of becoming a guarantor is simple. If you agree to become the guarantor for a borrower, the borrower can fill out the form and enlist you as their guarantor.
The lender will check the form, and if everything looks as needed, they will approve your request.
However, lenders usually call the guarantor and educate them on the loan process. They also explain every document before signing. The reason is that you can't back out as the guarantor once signed.
Once the documentation is done, the loan amount is transferred to the borrower's account.
You should always take the opportunity to help your friend or family if they ask you to become their guarantor for any loan type. However, before becoming their guarantor, keep the following in mind:
Many times, the guarantor decides after a few years of signing the agreement that she does not want to be a guarantor any longer. Unfortunately, you can no longer decide once you become the guarantor for any loan account. After signing the agreement as a guarantor, you are liable for the positive and negative outcomes. No bank/lender will remove you as a guarantor as your credit score, employment, and financial status were considered for loan approval.
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