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Introduction

The number of Personal Loans disbursed by various lenders has grown by 140 percent in the last financial year, making it the most popular loan product amongst millennials. The success of the financial product in the market is largely attributed to its most significant feature of being unsecured or ‘Collateral-free’.

However, in certain situations, some banks may ask for a guarantor who can vouch for the repayment of the loan amount before disbursing your personal loan.

Who is a Personal Loan Guarantor?

A personal loan guarantor is an individual who acts as a witness for the lending procedure and takes responsibility to affirm the repayment of the loan. Incase of a payment default by the borrower, the personal loan guarantor is liable to pay the due amount to the lender in place of the borrower.

Why do banks ask for a Guarantor?

Various banks and financial institutions today require a personal loan guarantor to mitigate their risk of financing individuals with poor credit health and history.

Since usually there is no collateral involved, banks feel that the only way to recover their debt in some cases would only be if someone would be willing to vouch for the borrower.

Situations under which a bank asks for a Guarantor

There are certain stipulated conditions which banks use to determine if the personal loan requires a guarantor.

These are as follows:-

  1. The borrower has a poor credit history and credit score. Usually most banks require a guarantor if the credit score is below 750.

  2. The borrower has an unstable or varying income

  3. The borrower has a poor education background

  4. The borrower gets frequent transfers to different cities

There are certain prerequisites that are required to be an eligible guarantor which differ from institution to institution. However, a few basic requirements such as good credit health, being a resident of India and having proper documentation and proofs remain mandatory across all lenders.

Serving as a guarantor may also impact your credit score if the borrower defaults on his/her payments for their personal loan as credit information companies such as CIBIL keep a record of guarantors as well. Also read about Is Personal Loan Prepayment Beneficial?

What happens when the borrower does not repay the Personal Loan?

When you sign up as a guarantor to their personal loan, you are legally bound to become liable for the loan as the principal borrower in case of default payments. If the borrower fails to repay the loan, the following series of events happen:-

  • Banks will send a notice to the guarantor who is legally bound to take up the responsibility of clearing the loan. In case the guarantor fails to do so, the bank will treat him/her as a ‘wilful defaulter’.

  • This will consequently reflect poorly on the credit rating of the guarantor which will then hamper their ability to get a loan easily in the future.

Hence, a guarantor must ensure that he/she regularly checks up on the borrower they are a personal loan guarantee for, and confirms the payment of interests and dues by them.

It also must be noted that a guarantor is free to withdraw his/her personal loan guarantee provided by them to the borrower at any time by approaching the bank.

FAQ’s on Personal Loan Guarantor

  • ✔️Is a guarantor required for a personal loan?

    No, a bank guarantor is not always a necessary prerequisite to avail unsecured personal loans. However, if the borrower's credit score is poor (i.e less than 750) , a bank may demand a personal loan guarantee from an eligible guarantor on their discretion.

  • ✔️What is the role of guarantor in personal loan?

    The guarantor acts as a witness to the loan transaction and takes the responsibility to assure that the borrower will repay the loan. The guarantor is also legally bound to repay the lender in case the borrower defaults on his/her payments.

  • ✔️How much can you borrow with a guarantor?

    The amount that you can borrow with a guarantor varies largely on the basis of your and your guarantor’s credit health.

  • ✔️What requirements do I need to fulfill to become a guarantor for someone?

    Different banks and formal lenders have different eligible criteria for a guarantor but some common criterias for a personal loan are that a guarantor must have a stronger credit health than that of the borrower, they must have a stable income, they must be a permanent resident of the country and must possess valid documentation and ID proofs.

    Considering how time consuming the process of loan application is, it is best to select a personal loan of your choice online itself by browsing through the multiple personal loan options available on Finserv MARKETS.

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