Loan

Pros and Cons of Getting a Guarantor When Taking Out a Loan

Sometimes, when taking out a loan from a licensed money lender, they may ask you to co-sign with a guarantor. A guarantor is someone who can assure the lender that they will take responsibility for paying off the loan in case you cannot in the future. In most cases, a guarantor is a parent, sibling, or family member. Co-signing with a guarantor increases the chances of getting approved for your loan.

However, getting a guarantor has both pros and cons. Consider each of them before making your decision. First off, here are the benefits.

Helpful if you have not built your credit history

If you don’t have a long history of credit yet, lenders will need additional guarantees that you will be able to repay the loan. They need to know two things:

  1. if you are financially capable of paying back the money you will borrow; and
  2. if you can be trusted to pay back what you will owe.

This is the kind of information they can get from your credit score and credit history. Without it, lenders need extra assurance that you can pay the loan back and that you are trustworthy.

Co-signing with a guarantor is one of the best ways to achieve these. With a guarantor alongside you, lenders will be more likely to approve your loan even if your credit history is not that extensive.

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Easier to get approved for loans

Even if your credit history is good and you have built a sizeable credit history, a guarantor can still make loan approval a lot easier. A guarantor assures the lender that there is someone to repay the loan in your place in case you become unable to.

Think of it like security for the lender. It’s for this reason that loans with a guarantor are called ‘secured loans’. Loans you can take out without a guarantor are called ‘unsecured loans’, as lenders risk losing all the money you owe them in case you default on your loan.

You can get better loan terms

Because lenders get a better assurance of being paid back, co-signing a loan with a guarantor also opens up opportunities to get more favourable repayment periods, interest rates, and other loan terms.

Now, take a look at the disadvantages of getting a guarantor.

Guarantor’s credit score is at risk

When a guarantor co-signs a loan with you, they put their credit score on the line for you as well. If you consistently pay your monthly dues on time and in full, that’s a good thing for both your credit scores. But any time you miss payments, or worse default on your loan, both your credit scores suffer as well.

Becoming your guarantor also affects their chances for getting approved for loans themselves. It will be as if they’re applying for another loan while repaying a previous loan – which is the one they co-signed with you.

Guarantor becomes legally responsible if you default

This is exactly the role of your guarantor – if ever you can no longer pay back your loan, they will automatically assume that responsibility. They will be legally responsible for repaying the loan on your behalf. This includes interest and other fees associated with the loan.

Defaulting and passing on the responsibility to your guarantor – even if it’s unintentional – may strain your relationship with them as well.

It shows you are not financially independent yet

Needing a guarantor to qualify for a loan tells lenders of your lack of financial independence. This means you still need extra help to meet your needs. For lenders, this is a huge risk. In turn, your chances for getting approved for other loans becomes smaller.

Conclusion

A guarantor can give you better chances of getting approved for a loan, but it does come with serious risks. Consider the benefits and drawbacks of co-signing with a guarantor before taking out a loan. If you think the risks are worth taking, and your guarantor agrees, go ahead. But if you’re in doubt, find alternatives. Avoid risking your finances and your relationship with your guarantor.

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