Loan Guarantor: Everything you need to know

  • Published on: 15 Feb 2024
Loan Guarantor: Everything you need to know

Involving a loan guarantor when applying for credit is a smart decision to increase your approval chances. One of the most essential criteria lenders consider while assessing your loan eligibility is your credit score.

If you have a low score or your previous experience at handling credit hasn’t been fruitful, you may find it difficult to get hassle-free approval. However, when there’s a guarantor involved, the risk parameter for lenders decreases. 

Eventually, your approval chances get better, as the lender is rest assured of your repayment ability. To know how this happens and what is a loan guarantor, read on.

Who is a Guarantor in a Loan?

In simple words, it is a person who takes up the responsibility for another individual’s debt. Here are some essential criteria a loan guarantor must have:

  • High credit score
  • Stable income and employment
  • Strong repayment history
  • Low credit utilisation ratio

While most lenders insist that your guarantor must have completed 21 years, they can be your blood relation or a close family friend. Ensure they have a spotless credit history and are willing to take on the additional responsibility. 

Wondering when is a loan guarantor required? Here’s a list of a few instances:

  • When the applicant hasn’t been able to build a credit history
  • When a borrower has a low credit score
  • When the applicant has just started working in a new firm 
  • When the borrower doesn’t earn sufficient income 

What is the Role of a Guarantor in Loan?

Here are some key responsibilities you need to know:

  • A guarantor needs to sign a legally binding agreement given by the lender, specifying that the primary borrower will repay the dues within the stipulated timeline
  • The guarantor is liable to pay the loan amount in case the primary borrower defaults
  • The guarantor needs to repay the principal loan amount, along with the interest and additional penalties associated with the loan

Also Read: Different Types of Loans that You Should Know

Pros of a Guarantor in Loan

Here are some benefits:

  • Helps the primary borrower avail of a loan in case they’re not eligible for the credit
  • Assists the borrower in getting the required funding on favourable terms 
  • Allows the primary borrower to get a higher loan amount
  • Provides the borrower an opportunity to improve their credit score

Cons of a Guarantor in Loan

Check out a few limitations:

  • The guarantor could be responsible for paying the due amount
  • The credit score of the guarantor can be impacted negatively
  • Getting another loan for a different purpose can become difficult
  • A guarantee for a loan can’t be cancelled once it’s offered

Key Tips for a Guarantor in Loan

Here are some essential tips that a loan guarantor must keep in mind:

  • Read the loan agreement carefully, including all the clauses, tenure and potential liabilities
  • Monitor the loan repayment regularly to check if the primary borrower is making timely repayment
  • Take the help of a co-guarantor to reduce your risk and potential liability
  • Make sure that the primary borrower for whom you’re serving as a guarantor is trustworthy

Consider these points before becoming a guarantor:

  • The reason for which the primary borrower is requesting you to be a guarantor
  • The reason why they need the loan
  • Whether you can repay the loan if the primary borrower defaults
  • If the primary borrower is trustworthy and a responsible individual
  • If you’re comfortable with repaying the loan on the borrower’s behalf

With this information, you can involve a loan guarantor in your application and get funding easily. Remember, choosing a suitable lender is important. Fibe is one such lender offering Online Personal Loans of up to ₹5 lakhs at affordable rates.

You can repay the loan conveniently over 36 months through EMIs. Download the Personal Loan App or log in to our website to apply.

FAQs on Loan Guarantor

What is the responsibility of a guarantor on a loan?

Here are some crucial points to keep in mind:

  • A guarantor needs to sign a legally binding agreement specifying that the primary borrower will repay the dues on time
  • The guarantor is responsible to repay the loan if the primary borrower defaults
  • The guarantor needs to repay the loan amount, interest and additional loan penalties

What are the risks of being a loan guarantor?

Here are some risks:

  • The guarantor is liable to repay the due amount if the primary borrower defaults
  • The guarantor’s credit score will have a negative impact if the primary borrower fails to repay the loan
  • Availing of another loan at the same time for a different purpose can be difficult
  • If an individual becomes a guarantor for a loan, they can’t cancel it

Can a guarantor be removed from a loan?

No, once an individual becomes a guarantor, they can’t be removed. 

What is the RBI rule on guarantors?

The RBI allows financial institutions to set their own guidelines in case any borrower requires a guarantor. The lender gauges the following parameters before approving any applicant as a guarantor:

  • Income 
  • Creditworthiness 
  • Employment status
  • Residential details

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