What Is a Guarantor on a Loan?
Posted by Frank Gogol
After dreaming of studying in the United States, you have finally secured a place at a prestigious university in the field of your choosing. Now comes another big hurdle: figuring out how to pay for the schooling. Getting a student loan is much easier for a U.S. citizen or permanent resident when compared to an immigrant student because a guarantor or co-signer is typically required.
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What Is a Guarantor on a Loan?
If an immigrant has no credit or a low credit score in the United States, banks/lenders require a person who can take responsibility in case of a failure to repay the loans. This person is known as a guarantor.
The guarantor must be a U.S. citizen or permanent resident with a strong credit score. This provides peace of mind for lenders who worry about losing their funds. A guarantor can be your friend, family member, or colleague.
Guarantor vs. Co-Signer
Banks/lenders require, as an added security measure, someone to take responsibility for the principal applicant (primary borrower) in case of loan default. The person can be a guarantor or co-signer. The credit score of the guarantor or co-signer plays an important role in deciding the disbursement of loans to low credit score applicants. A guarantor or co-signer differ only in terms of the overall responsibility and liability.
While a co-signer is equally responsible for the loan, a guarantor is a secondary form of repayment. A guarantor is only liable when the primary applicant fails to repay the loan.
Pros and Cons of a Guarantor
Having a guarantor to vouch for you can help you secure a loan more easily. Let us examine what benefits you get with a guarantor backing you.
Benefits of a Guarantor
- An increase in the chance of your loan application getting approved by the lender.
- Some banks can lend you a bigger amount based on the guarantor’s credit history.
- Having a guarantor before applying for loans works well for people with no or poor credit history.
As with most things, there are downsides to a guarantor loan as well.
Drawbacks of a Guarantor
- Before you ask someone to be a guarantor on your loan, you will need to open your financial books to the person.
- Lenders do not lower the interest rates solely because you have a guarantor with a good credit history.
- If the principal borrower is not able to repay the loan or misses one or more EMIs, the credit score of the guarantor can be adversely affected.
How to Find a Guarantor
So far, we learned the basics of having a guarantor’s name on your application form. However, finding a guarantor can itself be a daunting task. Typically, we would turn to family members in situations like these, but if you are an immigrant living in the United States, you will have to look for someone else to be a guarantor on your application. Here is how you can find the right one for you:
List Your Requirements
Before you approach a person to be your guarantor, you must ascertain the following things:
- Accessibility. The guarantor will be required to come in for signing and other meetings.
- Asset and credit ratings of your prospective guarantor.
You can also check with your lender if they have a list of guarantors.
Make a Checklist of Potential Guarantors
This can be done based on the type of loan and amount required.
Meet Your Guarantor
Arrange a one-on-one with your guarantor to explain your requirements and other details like payment terms, contract period, etc.
As a last resort, if you are not able to find anyone to be your guarantor, you can try obtaining the services of a commercial guarantor. This person or company will charge a nominal one-time fee to be your guarantor.
Considerations for Potential Guarantors
Once a person agrees to be your guarantor, whether a family member or a commercial guarantor, there are a few things they must take into consideration:
- The person must take the time to thoroughly go through the entire loan contract. This ensures no ambiguity later with respect to the payment terms, contract period, security for the loan, etc.
- In case it is a family member, the strain on the relationship in case of a default or breakdown of the arrangement must be taken into consideration.
- If the guarantor has any doubts, you mustn’t force the person to sign the papers.
- If needed, both parties must visit a solicitor or financial adviser to go over and completely explain all the risks involved.
Getting a loan can be a cumbersome process, especially if you are an immigrant with no credit score. Though you might be able to find a guarantor to get a loan from the lender, you must take your time to understand all the risks involved and weigh the pros and cons of the situation before proceeding.