Personal Loan Guarantor – Understand the Benefits and Responsibilities

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Getting a personal loan guarantor is one way to be eligible for a loan if you do not have a desirable credit score or do not meet other requirements, such as having a consistent source of income. 

What a guarantor means is someone who takes on the obligation of repaying a lender if you, as the borrower, default on your debt. Let’s dive deeper into the role of a personal loan guarantor, the responsibilities, risks, and advantages. 

Who Can Be a Personal Loan Guarantor?

Given the purpose of a personal loan guarantor, there are a few requirements that are already implied. A personal loan guarantor should display a high level of creditworthiness and financial responsibility. This mitigates the risk of lending money to people who display questionable levels of creditworthiness.

When deciding on a guarantor, you should look for a family member or close friend that is of legal age. Your guarantor should have an outstanding credit score of 610 or above and no defaults or judgements on the guarantor’s credit history. In terms of income, your guarantor should be able to afford your loan repayments on top of their current financial responsibilities. 

Additionally, lenders may require that your guarantor be a homeowner. This shows stability and increased commitment to being financially responsible. Some lenders may further stipulate that you and your guarantor should not have financial ties. This usually means that the two of you do not share assets or have a joint bank account.

The exact requirements regarding your guarantor’s credit score and income may vary depending on the amount you are borrowing, your financial situation, and your lender. When contacting a loan broker, take the time to ensure that you understand the terms and conditions of your loan agreement and the role of your guarantor.

Responsibilities of a Personal Loan Guarantor

The main responsibility of a personal loan guarantor is to provide lenders with assurance and peace of mind. Your guarantor achieves this by sharing the legal responsibility for your debt. From a financial point of view, this means ensuring that they have enough liquid money to make your loan repayments each month or settle your debt in full.

Outside of this, your guarantor may assume the informal responsibility of helping you manage your loan and debt responsibly. This can mean many different things depending on your unique financial situation, but broadly speaking, your guarantor can motivate you towards making more responsible decisions. 

Cultivating healthy spending habits and changing the way you make financial decisions can be greatly aided by having a support system. A good support system can influence you to make smarter financial decisions by offering practical advice based on their experiences and holding you financially accountable in a more informal setting.

Inherently, your personal loan guarantor may act as a role model from whom you can learn more about building your credit score. Your guarantor can also check in with you to remind you to make your repayments or lend an ear if you’re overwhelmed making financial decisions. 

Risks Faced by Personal Loan Guarantors

Along with the immense responsibility, personal loan guarantors also face a significant amount of risk. Guarantors cannot shift their responsibility to someone else during the loan term. In other words, until the debt is completely settled, your guarantor must be prepared to be legally responsible for your loan.

If you do not make payments on time or in full, it not only affects your credit score but the credit score of your guarantor as well. This may put your guarantor in a sticky financial situation that leaves them dipping into their savings or money that they set aside for other expenses each month. This may also put a damper on your personal relationship with your guarantor. 

Additionally, your guarantor’s ability to borrow may be hindered for the duration of your loan term. If your guarantor does take out a separate loan for their own purposes, such as a home or car loan, they may face a higher interest rate.

To understand the full repercussions of standing as a guarantor, you and your guarantor should ask your loan broker about what both of you can and cannot do for the duration of the loan term. Be honest with your broker about your concerns and any plans to undertake other financial responsibilities during the loan term, such as major renovations, hosting events such as weddings, or purchasing properties or vehicles.

Advantages of Having a Guarantor When You Borrow

Beyond helping you secure a personal loan, how else can having a guarantor aid you? One of the outright advantages of having a guarantor is access to an increased borrowing limit. Having a guarantor can also help you avoid desperately contacting dodgy loan providers.

With your guarantor acting as an ‘insurance’ of sorts, your lender may be persuaded to offer you more favourable loan terms. In addition to helping you secure the loan amount that you need, having a guarantor may aid in negotiating your interest rate.

Lastly, taking out a personal loan with a guarantor can help you immensely if you make the most of the opportunity. By making your payments on time and in full, you will be positively contributing to your credit score. This is also a chance to work on your financial discipline and address your bad financial habits.

Summary of the Obligations of a Guarantor

  • A guarantor is someone who will take responsibility for repaying a personal loan if you should default.
  • Guarantors should have an excellent credit history and sufficient assets/disposable income to afford your loan repayments.
  • Informally, guarantors can form part of a support system that helps you achieve an ideal credit score and healthy financial habits. 
  • Guarantors face a significant amount of risk with no reward! 
  • Standing as a guarantor can negatively affect your ability to take out separate loans during the loan term. 
  • Taking out a personal loan with a guarantor can keep you away from unscrupulous unregistered lenders
  • Having a guarantor can help you negotiate better loan amounts, interest rates, and terms. 

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*Representative example: Estimated repayments of a loan of R30 000 over 36 months at a maximum interest rate, including fees of 27.5% APR would be R1 232.82 per month. BetterLoans is an online loan broker and not a lender. Our service is free, and we work with NCR-licensed lenders in South Africa. Interest rates charged by lenders can start as low as 20% APR, including an initiation and service fee determined by the lender. The interest rate offered depends on the applicant’s credit score and other factors at the lender’s discretion. Loan amount R500 – R350 000. Repayment terms can range from 3 – 72 months. The minimum APR is 5%, and the maximum APR is 60%.

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