What Is the Role of a Guarantor on a Loan?
Many banks and lending institutions may require a borrower to bring in a guarantor before giving them a loan.
There are many reasons why an individual may need a guarantor. Among them include if their credit score doesn’t meet the lender’s requirements, if they have an unstable source of income, among others.
But what is the role of a guarantor on a loan? Are there any benefits and risks to being one? Read on to find out.
Who Is a Guarantor, and What Is Their Role on a Loan?
A guarantor is a person who signs an agreement that they will repay a borrower’s loan if they are unable to.
Many banks and lending platforms require individuals to have certain qualifications before being guarantors. For starters, they have to be of a certain age limit. Most lenders require guarantors to be between 25 and 75 years, the working-age range.
The potential guarantor should also have a positive credit score. It wouldn’t make sense if the individual a borrower has brought to be their guarantor also has had trouble paying back their loan in the past.
Another requirement is that they should have a stable source of income. Some lenders also check if a potential guarantor’s assets are more than their liabilities. This proves to the lender that they can afford to pay back the loan if the borrower can’t.
One thing individuals need to keep in mind before agreeing to be a guarantor is that once they sign the agreement, it can be challenging to withdraw from being a guarantor.
Withdrawing is quite a complex process that involves approval from the lending institution and the borrower. And in most cases, the lender will approve the loan only if another person is available to step in as the borrower’s guarantor. You can visit the site Creditonline.bg to get all the information about loans and other useful financial information.
What Are the Advantages of Having a Guarantor?
In this case, the borrower mostly benefits from this agreement and not the guarantor.
The main advantage of a borrower having a guarantor is that the bank or lending institution will grant them a loan regardless of their credit score and history. If the borrower has a poor credit score, then the guarantor’s positive credit score will balance out theirs, increasing their chances of getting the loan.
A guarantor also enables the loan applicant to receive a higher amount than their initial loan limit. The lender can be confident that a guarantor will repay the loan if the borrower defaults on the payments.
However, one benefit that the guarantor can enjoy is that they can choose the loan amount they are responsible for.
Many banks and lending institutions allow guarantors to choose the loan amount they want to be liable for. Doing so will minimize the burden of repaying it if the borrower can’t.
What Are the Disadvantages of Being a Guarantor
The guarantor will be responsible for repaying the loan if the borrower fails to pay it back. If the guarantor cannot repay the loan, then their credit score will be affected, and their assets will be at risk of being repossessed.
The guarantor’s credit score can be affected if a borrower fails to make a payment according to the loan repayment terms.
Another downside of being a guarantor is that the lender will not lower the borrower’s loan interest regardless of how strong the guarantor’s credit score is. If the borrower defaults on their loan payments, the total amount may be too overwhelming for the guarantor.
Being a guarantor means that the individual has to be open and honest about their financial status. This may include their assets, and source of income, to name a few. Many individuals may find this uncomfortable.
This guarantor situation may also negatively affect the relationship between the borrower and the guarantor, especially if the borrower defaults on their loan repayment.
What to Consider Before Agreeing to Become a Guarantor
Many people may instantly agree to become guarantors, mainly because of their relationship with the borrower. However, individuals need to consider a couple of factors before making this critical decision.
The factor to consider is the likelihood of the borrower repaying their loan. If the individual fails to pay back the loan, the guarantor becomes responsible for paying back the loan.
So, potential guarantors need to check the borrower’s capability of paying back that loan. One excellent way to do so is to check their credit history.
If the borrower has had trouble paying back several loans, then the individual has the right to reconsider their decision to be their guarantor.
Another critical factor is whether the guarantor can afford to pay back the loan if the borrower defaults on the loan repayment.
Potential guarantors need to keep in mind that the loan amount may be higher than the money the borrower initially took as a loan. This is mainly because of the interest rates and sometimes the penalty fees for late repayments.
This amount can be overwhelming for the guarantor to pay back, and it may negatively affect their credit score if they are also unable to pay.
So, the guarantor needs to evaluate whether or not they can afford to pay back the loan if the borrower fails to do so.
Conclusion
While agreeing to a borrower’s guarantor is considered a noble gesture, individuals need to understand the pros and cons of being a guarantor before signing the agreement.