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Guarantor Loans – Everything You Need to Know

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If it’s difficult for you to get a personal loan due to a poor credit score or low income, a guarantor can help. A guarantor can be a friend or family with a good credit rating. But guarantor loans come with their own share of risks for both the borrower and the guarantor.

Let’s understand a little more about guarantor loans:

What is a guarantor loan?

A guarantor loan is usually a personal loan, where the borrower has the financial backing of another individual – the guarantor.

The person willing to be a guarantor promises the lender to make repayments on the loan if the borrower defaults or is unable to repay. Thus, the guarantor enables the lenders to loan the money to the borrower at a reasonable interest rate.

While a guarantor is a definite advantage to the borrower, there are a few concerns the guarantor should assess before signing on the dotted line.

Understanding the role of a guarantor

A typical guarantor is over 18 years and is a resident of the country where the loan is being processed. Guarantors usually have exemplary credit histories and sufficient income to cover the loan payments in case the borrower defaults. In guarantor loans, the guarantor’s assets may be seized by the lender in the event of a default.

Who can be a guarantor?

The guarantor can be a close friend or a family member. In most cases, parents act as the guarantor for their child who has a low income and/or poor or no credit history.

What are the concerns for the guarantor?

Being a guarantor poses a lot of concerns. Below are a few risks that a guarantor needs to consider before taking up the responsibility:

Tip: Sign up as a guarantor only for a trustworthy and known person.

  • Credit History
  • Financial Burden
  • Credit Score
  • Loan Details

How guarantors are different from co-signers

Guarantors Vs. Co-Signers

Both the guarantor and co-signer help the borrower in getting the loan approved, but their role is different.

A co-signer arrangement occurs when the borrower does not meet the income criteria of the lender. On the other hand, a guarantor usually steps in when the borrower has sufficient income but is struggling to get a personal loan due to poor credit history.

When an individual agrees to be a co-signer, the asset owned is shared between the borrower and the co-signer. Guarantors have no claim to the asset bought by the borrower.

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