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When you have a low income or a poor credit remark, your chance of getting a loan with a lower interest rate is slim. However, if you can look for someone who can act as your guarantor, you may still be qualified to get a cheaper advance. In addition, your chance of getting the lender’s approval may also increase.
What Is A Guarantor Loan?
As the name implies, a guarantor loan is “guaranteed” by another person who can be another family member, your friend, colleague, or anyone who knows and trusts you. While you can have a low credit remark or a smaller source of income, your guarantor should have an excellent credit rating and a high income. In addition, he/she should be able to cosign the contract and agree to back you up in case you default on your repayments. In simple terms, the guarantor will act as your security and will take over the loan until it is fully settled.
Who Can Be The Guarantor?
The guarantor can be any qualified adult who “knows and trusts” you, meaning he/she has to meet the criteria set by the loan provider to be eligible. Normally, it includes having an excellent credit rating and a high income to ensure that he can afford the loan and the other fees should you stop repaying your debt.
It would also help if they own any collateral such as a home, although some lenders may accept those who are renting or living with family. However, the interest rate will be affected; homeowners are more likely to receive a lower interest rate compared to non-homeowner guarantors.
Being a guarantor is a big decision that both borrowers and potential guarantors should think about. The other person, who will cosign the loan, will not only risk his reputation but also his finances. In addition, this may cause strain to their relationship in case the borrower failed to keep up with the repayments and the guarantor is forced to take over the debt.
A guarantor is a third party presented by a borrower in the event that his credit score is not enough to meet the eligibility criteria set by the lenders. He is a person that agrees to pay off the borrower’s loan in the event that the borrower is no longer able to.
What is a guarantor?
Guarantors need to be 18 years old but not more than 75. They need to have a good history and they need to be able to prove to the lenders that he will be able to afford the loan payments if indeed the borrower defaults. This is why aside from their credit score, guarantors will often be tasked to show proof of their income before a lender will give their approval.
Responsibilities of a guarantor
When a borrower misses a payment, it is the responsibility of the guarantor to take on the payments. This is quite a huge responsibility and is also the reason why lenders go through such lengths as running affordability reviews on a potential guarantor to ensure that he can indeed fulfil such a commitment.
Of course, lenders will always try to get the money from the borrower first. Only after they have exhausted all their efforts towards recouping the money from the borrower and yet to no avail will they turn to the guarantor to take on the legal obligation that he has agreed to do. In addition, if the borrower ends up going bankrupt or gets involved in a position where he is no longer able to fulfil his dues, then all responsibility falls onto the shoulder of the guarantor to keep up with the payments.
If you are asked to become a loan guarantor, it is important that you determine ahead of time if you can trust the person you are guaranteeing to make the loan payments on time. You must see to it that they can truly afford the monthly repayments of what they’re borrowing. It is a huge responsibility and can have a considerable impact on your personal and financial circumstances. So, it is something that should not be taken on lightly.
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