Lenders frequently require certain loan applicants to provide loan guarantors. This condition is typically imposed when there are uncertainties regarding the repayment ability of the primary borrowers and co-borrowers. Additional circumstances that may prompt lenders to request loan guarantors include insufficient credit scores of the primary applicants, a precarious employment situation, loan amounts that surpass the borrowers’ eligibility, or when the primary borrower is approaching or has exceeded the age limit for loan applications.
In this context, it is important to examine the risks associated with serving as a loan guarantor:
Liability for Loan Repayment
Similar to primary applicants and co-applicants, lenders assess the income, employment status, credit history, repayment capability, and employer profile of the proposed guarantor during the evaluation process. The primary concern is that the loan guarantor will be responsible for ensuring the timely repayment of the guaranteed loan if the primary borrower and co-borrower(s) fail to meet their repayment obligations. In the event of a loan default, the lender will seek repayment from the guarantor for the outstanding loan balance, along with any penalties and additional charges incurred due to non-payment.
Therefore, individuals considering the role of a loan guarantor should strongly encourage the primary applicant and co-applicants to secure loan protection insurance. This measure can mitigate the repayment burden on the guarantor in the unfortunate event of the primary or co-borrowers’ death or disability.
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Impact on Credit Score
When individuals act as loan guarantors, they assume equal responsibility for the timely repayment of the loans they guarantee. Consequently, any delays or defaults in repayment can negatively affect the credit scores of the guarantors. This deterioration in credit score may hinder their future eligibility for loans and credit cards. Therefore, it is imperative to thoroughly evaluate the financial stability and repayment discipline of both the primary borrower and any co-borrowers prior to agreeing to serve as a guarantor.
Furthermore, it is advisable for guarantors to monitor the repayment status of the guaranteed loans closely. Regularly obtaining credit reports is also essential, as any missed payments or defaults will be reflected in these reports.
Impact on Loan Eligibility
The total outstanding balance of a guaranteed loan is treated as a contingent liability for the guarantor. As a result, once an individual agrees to be a loan guarantor, their eligibility for additional loans will be diminished by the amount of the guaranteed loan. It is crucial to evaluate any potential future loan needs before committing to guarantee a loan.
Difficulty in Exiting the Role
Once an individual becomes a loan guarantor, they cannot withdraw from this obligation until the lender and the primary or co-borrowers identify a mutually-acceptable replacement guarantor. This underscores the importance of carefully considering one’s near and mid-term loan needs before taking on the role of a loan guarantor.